An Apartment in Israel and US Tax: Renting, Selling, and Exchange-Rate Surprises

A US citizen living in Israel reports worldwide income to the IRS, and that includes an apartment in Israel: the rent it brings in, and the gain when it's sold. Israeli exemptions don't carry over automatically to the US return, and the math is done in dollars, not shekels.

Selling the home you lived in

The good news: the US exclusion on selling a main home applies to an apartment in Israel too. Someone who owned the apartment and lived in it for at least two of the five years before the sale can exclude up to $250,000 of gain, or up to $500,000 for a married couple filing jointly.

The difference from Israel is that this exclusion is capped, and it's calculated in dollars. Someone who bought twenty years ago in Jerusalem, Beit Shemesh or Efrat may find the dollar gain exceeds the cap, even when Israel charges no betterment tax on it at all.

The exchange rate you bought at is part of the gain

The purchase price is converted to dollars at the rate on the day you bought, and the sale price at the rate on the day you sold. If the shekel has strengthened since you bought, the dollar gain is larger than the shekel gain, and sometimes there's a dollar gain even on an apartment that barely rose in shekels. The mortgage can surprise you too: under US currency rules, repaying a shekel loan can create a currency gain that has to be reported, even when you didn't actually make a shekel.

Renting the apartment out

• Rent is reported on the US return, even if in Israel you chose the 10% track or an exemption
• Expenses are deductible: mortgage interest, municipal tax you paid, repairs, management fees
• In the US, depreciation on the building is mandatory. For a residential property outside the US it is generally spread over 30 years, and it increases the gain on sale
• Tax paid in Israel on the rent can generally be used as a credit against US tax on the same income

An apartment you lived in and then rented out

This is the most common case, and also the most complicated: a family lived in the apartment, moved and rented it out, and sold it a few years later. Here the two-out-of-five-years test decides whether the exclusion still applies, and depreciation taken during the rental period isn't covered by it. Anyone planning to sell a rented apartment should check the timing before signing, not after.

What else touches the apartment

The bank account the rent goes into counts for the FBAR. The apartment itself, when held directly in your name, isn't reported on the FBAR or on Form 8938. But if it's held through a company, the picture changes, and that needs checking.

How we help

We gather the documents ⁦(purchase and sale contracts, mortgage, rental income and expenses)⁩, work out the dollar picture in advance, and coordinate with a licensed US accountant who knows Israeli real estate. It's worth reaching out before a sale, while there's still room to plan. An initial check with no commitment.