How to save house down payment as expatriate US Citizen

Question

I am a US expatriate living in Israel and I am trying to save up in the next 7-10 years for a down payment on a house/apartment.

The prices here are what some would call a "bubble" here but even if they come down the banks still require 30% down payment on appraised value (per BoI) to give a mortgage.

The areas my wife and I are interested in range from 2-2.5M NIS so the down payment would be around 700K NIS.

My salary is high by Israeli standards (just at the FEIE cut-off) and I match 7.5% pension with employer and also put 10% (2.5% employee / 7.5% employer) into what is basically a 7 year tax free Israeli savings plan (Keren Hishtaldmut). With a very conservative growth rate it will be around 150K NIS in 7 years.

My concerns about putting money in investment funds here is the PFIC rules for my savings plan and also any mutual funds here would probably be PFIC as well.

An accountant had suggested I invest in US real estate, but not sure how that would affect taxes living here and owning/renting property in the US.

So to break it down I have come up with 3 options:

1. Save all money in Israel including investments until down payment sum reached. (Doesn't seem best from tax perspective)

2. Save cash and use tax savings fund but extra money invest in the US in real estate or some other vehicle until sum reached.

3. Save until we can buy a less expensive apartment and rent for us and rent out the apartment until there is enough equity to buy the place we really want.

Does this sound reasonable? Out of these options what would be the most likely to succeed and cause the least tax headaches? Any suggestions welcome.

Answer 1

So your accountant certainly knows much more than I do about Israeli tax law and its interactions with US tax law, which is zero. I'm going to look at this problem from the investment perspective which I hope to convince you is the most important place to start. Then you can adjust for interactions between the Isreali and US tax codes.

Even if the tax breaks are exceptional, it would be hard to recommend buying real estate as an investment in the 7-10 year time frame. Especially if this real estate is in the US. Open/Closing fees, mortgage fees, risk of property devaluation, bad-renters, acts of god, insurance costs and tax complications make short to medium term investments in real estate a particularly risky way to invest. Buying a local apartment and renting is somewhat more reasonable as you don't have to worry about the currency conversion and you can do a lot more research in your local environment and keep a closer eye on the property, it is still this a pretty concentrated risk.

Saving and investing using tax-advantaged accounts is generally considered a great way to build toward a down payment in the medium term. A mixture of mostly local bonds with some local and foreign stocks and more and more cash as it gets close to purchase time is generally what is recommended when saving for a home. This mixture is relatively safe and will tend to grow steadily without the concentrated risk of a real estate investment. PFIC rules are complicated and certainly worth taking some time to understand, but owning real estate especially in a foreign country seems much more complicated and certainly riskier.

There may be some rule that makes investing in REITs much better than normal stocks in these particular accounts though I would be surprised if that were the case. It is generally not true for people under just he US tax code.

So while option (1) may not be the absolute best from a tax perspective it would certainly be my guess as the most likely to succeed.