Schedule E · Form 1116 · Updated September 2026

Israeli rent, reported the American way.

Israeli rental income goes on a US return whether or not Israel taxed it, and whether or not you live in the United States. The mechanics are not difficult — but two of them work differently for foreign property than for American property, and both work against you.

It goes on Schedule E, in dollars

Israeli rent is ordinary rental income. It is reported on Schedule E alongside any US rental you own, with the ordinary deductions — arnona where you pay it, vaad bayit, repairs, insurance, management fees, mortgage interest.

Everything is converted to US dollars. Income and expenses are translated using an appropriate exchange rate, which for a steady monthly rent generally means translating as received rather than applying one annual rate to the total.

The IRS publishes a yearly average rate for the shekel, and tells you what to do with it: "To convert from foreign currency to U.S. dollars, divide the foreign currency amount by the applicable yearly average exchange rate." It does not insist on its own table — "Generally, it accepts any posted exchange rate that is used consistently" — but consistency is the condition attached.

IRS yearly average rate, Israeli new shekel per US dollar:

Tax yearShekels per dollar₪10,000 of rent becomes
20253.451$2,898
20243.701$2,702
20233.687$2,712
20223.361$2,975
20213.232$3,094

The right-hand column is the same rent in four different currencies-worth of dollars. Nothing changed in the apartment; the US figure moved by more than a tenth between 2021 and 2025. That movement is not a rounding detail — it is the reason a shekel-stable rental can look like a growing or shrinking business on a US return.

Depreciation is slower on foreign property

This is the rule most people miss, and it is not a small one. US residential rental property is normally depreciated over 27.5 years. Property used predominantly outside the United States is required to use the alternative depreciation system, which spreads the same cost over a longer period — 30 years for property placed in service after 2017, and 40 years for property placed in service before that.

The requirement is statutory, not interpretive. IRC §168(g)(1)(A) puts "any tangible property which during the taxable year is used predominantly outside the United States" onto the alternative depreciation system, and §168(g)(2)(C) fixes the recovery period for residential rental property at 30 years. The exceptions in §168(g)(4) cover aircraft, rolling stock, vessels, motor vehicles, containers and offshore equipment — there is no exception for real property. Publication 527, Table 2-1, carries the older figure in a footnote: "40 years for property placed in service before January 1, 2018."

On a building basis of $500,000 that is $18,182 a year over 27.5 years against $16,667 over 30 — a difference of $1,515 in the annual deduction. The difference is timing, not loss. The same $500,000 is deducted either way; what the longer period takes is the use of the money and two and a half extra years to finish. And land is outside all of it — "You can't depreciate the cost of land" — so the split between land and building in your purchase price decides how much of this even applies.

The result is a smaller annual deduction than an American owner would expect, for the whole life of the property. Confirm the applicable recovery period for your specific situation with your preparer, because the answer depends on when the property was placed in service.

And depreciation is not optional. Publication 527 is blunt: your yearly depreciation deductions "include any depreciation that you were allowed to claim, even if you didn't claim it." Israel says the mirror image about its own tracks, and the two rules meet on the day you sell — see selling an Israeli property as a US taxpayer.

Two numbers you need before you start — free calculator

Both of these are arithmetic on published figures, and both are the parts people get wrong first: the rent has to arrive on the return in dollars, and the depreciation has to run over the foreign period rather than the American one. Nothing here is a tax position.

This tool converts and divides — nothing more. It does not compute your Israeli tax, your US tax, your foreign tax credit, or the 3.8% net investment income tax, and it takes no view on whether Israel's 10% track is creditable. Nothing you type is sent anywhere; the arithmetic runs entirely in your browser. Confirm your figures with a US preparer who handles Israeli clients.

The foreign tax credit — and the 10% problem

Israeli tax you actually pay on the rent is generally creditable against the US tax on the same income, claimed on Form 1116 in the passive category. Where the Israeli tax is at least as high as the US tax on that income, the credit often eliminates the US liability — though it does not eliminate the filing obligation.

Israel offers residential landlords a choice of tracks, and the popular one is a flat 10% on gross rent with no deductions. In Israel it is simple and cheap. For US purposes it raises a real question: a levy on gross receipts, with no allowance for expenses, does not obviously meet the definition of an income tax for foreign tax credit purposes.

Israel is precise about what that election costs. The Tax Authority's guide states that on the 10% track you are not entitled to deduct expenses incurred in producing the rental income, nor depreciation on the apartment, and will not be entitled to set-off, credit or exemption in respect of it — a tax on the gross, by design. The alternatives: full exemption while monthly rent across all your apartments stays under ₪5,654 (the ceiling the guide gives for 2025), a tapering partial exemption up to double that at ₪11,308, and above it the ordinary brackets, where rental income starts at 31% — 10% for a landlord aged 60 or over. Since 2023 a landlord of a single apartment who rents a home themselves can deduct that rent, up to ₪90,000 a year, before applying the 10%.

The US test the 10% track has to pass is written down. Treas. Reg. §1.901-2 requires a creditable tax to allow cost recovery: "A foreign tax whose base is gross receipts, with no reduction for costs and expenses, satisfies the cost recovery requirement only if there are no significant costs and expenses attributable to the gross receipts included in the foreign tax base that must be recovered." The same regulation then leaves a door open: a levy "modified by an applicable income tax treaty" can qualify where the unmodified levy does not. And the treaty speaks to it — Article 26(1) closes by providing that the Israeli taxes listed in Article 1 "shall be considered to be income taxes" for US credit purposes. Whether the 10% track is one of those taxes is the question, not the answer. Separately, Notice 2023-55 and Notice 2023-80 let taxpayers apply the pre-2022 rules, and that relief has not been withdrawn.

We are deliberately not resolving this for you. Whether the Israeli 10% track produces a usable US credit is a technical determination with real money attached, and it should be made by your US preparer before you choose a track in Israel — not discovered afterwards. The order matters: the Israeli election is easy to make and awkward to unwind.

There is a symmetrical trap at the other end. If your rent falls under Israel's exemption ceiling and you pay no Israeli tax at all, there is no credit — and the income remains fully taxable in the United States. The Israeli exemption saves Israeli tax and produces nothing on the American side.

The 3.8% that no credit reaches

There is a second US tax on this income, and it does not behave like the first. The net investment income tax under IRC §1411 adds 3.8% on investment income, rent included, once modified adjusted gross income passes $200,000 single, $250,000 married filing jointly, or $125,000 married filing separately.

The foreign tax credit does not reach it. Treas. Reg. §1.1411-1(e) provides that amounts allowable as a credit only against chapter 1 tax — which is what the §901 foreign tax credit is — may not be applied against the §1411 tax. Israeli tax on the rent can therefore erase the ordinary US tax on it and leave the 3.8% standing behind.

For a decade the open question was whether a tax treaty could get around that. It is now much closer to closed. The Tax Court said no in Toulouse v. Commissioner, 157 T.C. No. 4 (2021), and on 31 August 2026 the Federal Circuit reversed two taxpayer wins in the Court of Federal Claims — Estate of Bruyea v. United States (No. 2025-1563) and Christensen v. United States (No. 2024-1284) — holding that neither the Canadian nor the French treaty supplies a credit against the NIIT. From the Bruyea opinion: "the Convention does not independently provide for a credit that can be taken notwithstanding the Code."

That reasoning turned on a clause the US–Israel treaty also contains. Article 26(1) opens: "In accordance with the provisions and subject to the limitations of the law of the United States … the United States shall allow to a citizen or resident of the United States as a credit against the United States tax the appropriate amount of taxes paid or accrued to Israel." Those are the words the courts read as making the credit depend on domestic law — and domestic law does not extend it to the NIIT.

Decided on 31 August 2026, and not the last word. Bruyea and Christensen are Federal Circuit decisions; further review is possible, and neither concerned the Israeli treaty. What can be said is what was held, on what language, and that the Israeli treaty carries the same language.

What this means in practice

An American owner is not choosing between the Israeli tracks on Israeli grounds alone. The track that minimises Israeli tax can be the one that maximises the combined bill, because it removes the credit that would otherwise have offset the US tax. The comparison has to be run across both systems together, once, before the election — and then it is largely settled.

Important. This page is general information about how US federal tax rules interact with Israeli property. It is not tax or legal advice, it is not a substitute for a licensed adviser, and it does not cover state tax, which follows its own rules. US international reporting carries severe penalties for getting it wrong — including penalties that apply even when no tax is owed. Work with a US CPA or Enrolled Agent who handles Israeli clients before you file or decide anything.

Frequently asked questions

Do I report Israeli rent in the US if Israel already taxed it?

Yes. US citizens and residents report worldwide income, and the treaty does not change that because of its saving clause. Relief from double taxation comes through the foreign tax credit on Form 1116, which offsets US tax by the Israeli tax paid on the same income, rather than through an exemption.

How long do I depreciate an Israeli apartment over?

Property used predominantly outside the United States must use the alternative depreciation system, which is slower than the 27.5 years applied to US residential rental — 30 years for property placed in service after 2017 and 40 years for earlier property. Confirm the period that applies to your property with your preparer.

Can I claim a US credit for Israel's 10% rental tax?

This is genuinely contested and we do not answer it here. The 10% track applies to gross rent with no deductions, and a levy on gross receipts does not clearly qualify as an income tax for US foreign tax credit purposes. Raise it with a US preparer before electing a track in Israel, because the election is easier to make than to reverse.

My Israeli rent is under the exemption ceiling. Is it tax-free?

It may be exempt in Israel, but it is still taxable in the United States if you are a US citizen or resident. Worse, because no Israeli tax was paid there is no foreign tax credit available to offset the US tax on it, so the Israeli exemption produces no American benefit.

Does the foreign tax credit cover the 3.8% net investment income tax?

No. Treasury regulation 1.1411-1(e) provides that credits allowable only against chapter 1 tax, which is what the foreign tax credit is, may not be applied against the section 1411 tax. On 31 August 2026 the Federal Circuit held in Estate of Bruyea and in Christensen that the Canadian and French treaties do not supply one either, relying on wording that the US-Israel treaty also carries in Article 26(1). Further review is possible and neither case concerned Israel.

What exchange rate do I use for Israeli rent?

The IRS publishes a yearly average rate for the shekel and instructs you to divide the shekel amount by it. It does not require that table specifically: it generally accepts any posted exchange rate used consistently. The average rate ran from 3.232 shekels per dollar in 2021 to 3.451 in 2025.

Sources

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