Renting Out an Inherited Israeli Apartment From the US: Three Israeli Tax Tracks, One American Return, and the Choice That Follows You to the Sale

This is orientation, not legal or tax advice. It maps what exists and the questions to take to a licensed professional. It does not tell you what to do about your own estate or taxes.

A daughter in New Jersey inherits her mother's apartment in Petah Tikva. She is not ready to sell. The tenant is good, the rent is NIS 7,000 a month, and leaving things as they are feels like the cautious choice.

It is also a choice that puts her into two tax systems at once, on the same money, under rules that do not match at any point. Israel will let her pick one of three ways to be taxed on the rent. The United States will tax the rent its own way regardless of what she picks. The foreign tax credit that is supposed to reconcile the two covers less than people expect. And the Israeli track that looks cheapest while she holds the apartment is the one that raises her Israeli tax on the day she sells it.

This page is the rental years. Inheriting the apartment and the absence of a step-up in Israel are covered in inheriting an apartment in Israel as a US heir. Getting it into your name is registering an inherited Israeli apartment at the Tabu. The sale is selling an inherited Israeli apartment from the US. Read those for the bookends. Read this one for what happens in between.

The rent is yours from the day of death, even while the account is frozen

Under section 1 of the Succession Law, the estate passes to the heirs at death. The apartment, and the rent it produces, belong to the heirs from that date in their inherited shares. The succession order confirms the shares; it does not create them.

That matters because the tenant usually keeps paying into the deceased's Israeli bank account, which the bank freezes on notice of death. The money sits there, and it is still the heirs' income. For the Israeli side, the tax year does not wait for the succession order. For the US side, a US person reports worldwide income in the year it is received, and "received" here is the tenant's payment into an account you own a share of, not the later day the bank releases it. If the order takes eleven months, you have eleven months of rental income to account for in both countries before you can touch a shekel of it. The frozen-account mechanics are in your Israeli parent died and the bank froze the account.

Two practical consequences. Tell the tenant, in writing, to keep paying and to keep receipts. And tell your US preparer about the apartment in the year of death, not the year the money arrives.

Israel gives you three tracks, and you choose each year

Israeli law treats residential rent received by an individual under three alternative regimes. You are not locked in. The choice is made year by year, and the right answer for a foreign-resident heir is usually not the one Israeli relatives assume.

The exemption track. Under the Income Tax (Exemption from Tax on Income from the Rental of a Residential Apartment) Law of 1990, residential rent below a monthly ceiling is exempt and need not be reported. The ceiling was NIS 5,654 a month for 2025, and practitioner sources report it frozen at that figure for 2026 under the 2025 Economic Arrangements Law rather than indexed as in earlier years. Above the ceiling the exemption does not vanish at once. Between one and two times the ceiling it shrinks shekel for shekel: rent of NIS 7,000 exceeds the ceiling by NIS 1,346, so the exempt portion falls to NIS 4,308 and the remaining NIS 2,692 is taxed at the marginal rates described below. Above twice the ceiling the exemption is gone.

The 10 percent track. Section 122 of the Income Tax Ordinance lets an individual pay a flat 10 percent on gross residential rent from property in Israel. Gross means gross: no deduction for the management agent, the insurance, the repairs, or depreciation, and no personal credit points. The tax is due within thirty days of the end of the tax year, so rent for 2026 is paid by 30 January 2027. For rent above the exemption ceiling this is the track most landlords end up on, because it is simple and because the alternative starts at 31 percent.

The marginal-rate track. Section 121 taxes rent as ordinary income. Rent is not income from personal exertion, so for an individual under 60 the brackets start at 31 percent rather than at the bottom of the scale. Someone aged 60 or over in the tax year starts at the lowest bracket, which can make this track attractive for an older heir. Against the income you deduct the expenses of producing it and depreciation on the building. This is the only track under which Israel lets you deduct anything.

Two things about a foreign-resident heir that a cousin in Haifa may not know to mention. The tracks are available to a non-resident individual as well as a resident; the apartment is in Israel, and that is what section 122 and the 1990 law look at. And whether a one-line payment under the 10 percent track discharges your Israeli filing obligation, or whether a foreign resident with Israeli-source income must open a tax file and file a return, is a question your Israeli accountant should answer for your facts before the first payment is due. Do not assume the answer is the same as for your cousin.

The track you pick now reaches the mas shevach bill at the sale

This is the part that does not appear on the comparison tables Israeli landlords pass around, and it matters more for an heir than for anyone else.

Israel does not give a step-up in basis at death. The heir inherits the deceased's acquisition date and acquisition value, so the appreciation tax on an eventual sale runs from whenever the parent bought the apartment, a point covered in inheriting an apartment in Israel as a US heir. That old, low basis is then reduced further by depreciation during the rental years.

Under the marginal-rate track that is expected: you deducted depreciation against the rent, so the acquisition cost comes down by what you deducted. What surprises people is that the same reduction applies under the exemption track and the 10 percent track, where no depreciation was ever deducted. The Israel Tax Authority's position, reflected in section 122 and applied in practice, is that the depreciation that could have been deducted is treated as if it had been, and is added back to the gain when mas shevach is computed. You did not get the deduction. You get the add-back anyway.

For a landlord who bought the apartment last year this is a rounding error. For an heir whose parent bought in 1985, whose Israeli basis is already a fraction of today's value, it is an additional layer on the largest tax event in the file. The longer you rent before selling, the larger it gets, and nothing you do on the US side offsets it.

The United States taxes the rent one way only

A US citizen or resident reports the rent on Schedule E of Form 1040, converted to dollars. The IRS accepts its published yearly average exchange rate for income received evenly through the year. Against the rent you deduct the ordinary and necessary costs of the rental under the rules in Publication 527: the management agent, the building committee (va'ad bayit) charges you pay, insurance, repairs that restore rather than improve, professional fees, and the cost of travel to the property where the trip is primarily for the rental. Improvements are capitalized, not deducted.

Then comes the line that Israel has no equivalent for. You are required to depreciate the building. Foreign residential rental property is depreciated under the alternative depreciation system of section 168(g), straight-line over 30 years for property placed in service after 2017, not the 27.5 years used for a US rental. The starting point is not your mother's 1985 price. It is the fair market value at her date of death under section 1014, which Revenue Ruling 84-139 confirms applies to foreign real property inherited from a non-US person, allocated between land, which is not depreciated, and the building, which is.

That is the same date-of-death appraisal the sale article tells you to obtain. If you are going to rent, you need it in year one, not at the sale, because the first depreciation deduction is computed from it. Get it from an Israeli appraiser (shamai) in the months after death, in writing, with a land and building split.

Depreciation is not optional. Under section 1016(a)(2) your basis is reduced by the depreciation allowable whether or not you claimed it, and Publication 544 says the same in plain words. An heir who skips it for six years loses the deductions and still carries the basis reduction into the sale, where the gain attributable to depreciation is taxed at up to 25 percent as unrecaptured section 1250 gain. So both systems reduce your basis for depreciation during the rental years. Israel does it to a 1985 number you cannot change. The United States does it to a date-of-death number that you at least got the deductions for, provided you took them.

One more US rule. Rental activity is passive under section 469. If the deductions and depreciation exceed the rent, the loss generally offsets only other passive income, unless you actively participate and your modified adjusted gross income is under the $100,000 to $150,000 phase-out range for the $25,000 allowance. An heir in New Jersey with a property manager in Israel can actively participate; approving the tenant and authorizing repairs is enough. A suspended loss is not lost. It is released on the sale.

Why the foreign tax credit covers less than you expect

The US-Israel income tax convention leaves Israel free to tax income from Israeli real property and, through its saving clause, leaves the United States free to tax its citizens on the same income. Relief is the foreign tax credit on Form 1116, in the passive category, and it has a limit: the credit cannot exceed the US tax on your net foreign-source income in that category.

Now put the two systems next to each other. Israel's 10 percent is computed on gross rent. The US tax is computed on rent after expenses and after a 30-year depreciation deduction on a stepped-up value. The US net figure is small. The US tax on it is small. The credit is capped at that small number.

An illustration, rounded and at an assumed exchange rate, to show the shape rather than the figures:

• Rent NIS 84,000 a year, roughly $23,000.
• Date-of-death value $600,000, of which $400,000 is building. Depreciation $13,333 a year.
• Expenses $4,000. US net rental income $5,700. US tax on it at a 24 percent bracket, about $1,370.
• Israel, 10 percent track: NIS 8,400, about $2,300.

The credit usable this year is about $1,370. The other $930 of Israeli tax carries forward under section 904(c) for ten years, against future passive-category foreign income. For an heir whose only foreign income is this apartment, the carryforward mostly accumulates until the sale year, when the mas shevach arrives and the same limitation bites again, as the sale article explains. The exemption track produces no Israeli tax and therefore no credit: you pay the full US tax. The marginal-rate track at 31 percent and up produces more Israeli tax than the US tax on the same income, and the excess carries forward in the same way.

Then the net investment income tax. Rental income is net investment income under section 1411, taxed at 3.8 percent above $200,000 of modified adjusted gross income for a single filer and $250,000 married filing jointly. The IRS position is that foreign income taxes do not offset it. Taxpayers have litigated treaty-based claims to the contrary, and the matter is not settled; plan on the IRS position unless your preparer tells you otherwise in writing.

The honest summary is that the heir usually pays the higher of the two systems on the rent, not the sum of them, and that a block of unused Israeli credit builds up that may or may not ever be used.

The account the rent lands in is reportable even though the apartment is not

An apartment held directly is not a foreign financial account. It is not reported on FinCEN Form 114 and not on Form 8938. The Israeli bank account the rent is paid into is a different matter. Once you have a financial interest in it, and the aggregate value of your foreign accounts exceeded $10,000 at any point in the year, the FBAR is due, and Form 8938 follows at its higher thresholds. Your inherited share of a still-frozen account counts. The clock and the thresholds are in FBAR and Form 8938 for an inherited Israeli account.

A recurring mistake is to keep the rent in Israel, spend it on the apartment's own expenses, never bring a dollar home, and conclude that nothing needs reporting. The income is reportable on Schedule E whether or not it crosses the ocean, and the account is reportable whether or not you draw on it.

The three tracks on one page

	Exemption track	10 percent track	Marginal-rate track
Israeli law	Residential Rental Exemption Law, 1990	Income Tax Ordinance section 122	Income Tax Ordinance section 121
Israeli tax on the rent	None below NIS 5,654 a month; tapers to nothing at twice the ceiling	10 percent of gross rent	From 31 percent (under 60) on net rent
Israeli deductions	None	None	Expenses and depreciation
Israeli reporting	None below the ceiling	Payment within 30 days of year end; filing obligation for a foreign resident to be confirmed	Annual return
Effect on mas shevach at sale	Depreciation deemed deducted, reduces the inherited basis	Depreciation deemed deducted, reduces the inherited basis	Depreciation actually deducted, reduces the inherited basis
US treatment (all tracks)	Schedule E on net rent; 30-year ADS depreciation from date-of-death value; passive-activity rules	Same	Same
Foreign tax credit	Nothing to credit; full US tax	Credit capped at US tax on net rent; excess carries forward	Credit capped at US tax on net rent; larger excess carries forward

What to ask, and who to ask it of

Ask your Israeli accountant, in writing:

• Which track is cheapest this year on these numbers, and will you re-run it each year?
• As a foreign resident, does the 10 percent payment discharge my filing obligation, or do I need a tax file and an annual return?
• What depreciation will the Tax Authority deem deducted against the acquisition cost if I sell after five years, and what does that do to the mas shevach estimate?
• Is there anything in the lease or the use of the apartment that would take it outside "residential" for section 122?

Ask your US preparer:

• Do we have a date-of-death value with a land and building split, and what will you accept as support?
• Which exchange rate will you use, and are we reporting from the date of death rather than the date the account was released?
• Am I actively participating for section 469, and what is my passive-loss position this year?
• How much of the Israeli tax is creditable this year, how much carries forward, and does the net investment income tax apply to me?
• Does the rent account trigger the FBAR and Form 8938 this year?

And ask both of them the question that sits between their two answers: across the rental years and the sale together, which Israeli track leaves the most in my account in dollars? The Israeli accountant will optimize the rent. The US preparer will optimize the credit. The deemed depreciation at the sale is the line neither of them owns unless you put it in front of both of them at once.