The phrase ITIN requirements often raises more questions than answers for buyers who live outside the United States but want to invest in American real estate. Foreign investors from Canada, Europe, South America, and elsewhere need a clear, practical path to comply with tax rules and avoid costly surprises at closing or when selling. In this blog, Mary Bartos of the Bartos Group of Premiere Plus Realty and Craig Couture with Craig Couture CPA explains what the ITIN requirements are, why they matter for rental income and property sales, and how a few simple steps can keep a transaction smooth for both buyers and sellers.
Why ITIN Requirements Matter
The Internal Revenue Service tracks income and transactions related to U.S. property ownership. When a nonresident buys or rents out property, the IRS expects that person to have a tax identification number. That is where ITIN requirements come in. Without an ITIN, rental income cannot be properly reported, and the sale of a property can trigger mandatory withholding that complicates the closing process.
“The IRS wants to track these individuals right and so what they’re going to want is a ITIN number.”
Who Needs to Meet These ITIN Requirements?
- Nonresident individuals who own or plan to own U.S. real estate but are not eligible for a Social Security number.
- Foreign investors renting their property through an agent or a rental pool, since agents must report rental income under a taxpayer identification number.
- Sellers who are nonresidents, because the buyer or closing company may be required to withhold on the sale if the seller lacks an ITIN.
Key Moments When an ITIN is Required
- At the time rent is being collected and reported.
- When a property is sold and the transaction triggers withholding under U.S. tax law.
- During closing, because closing companies will often withhold funds unless a seller provides an ITIN.
How withholding can affect buyers and sellers
One common pitfall is that the new buyer can become responsible for withholding the seller’s tax if the seller is a foreign person without an ITIN. Closing agents will often withhold a portion of the sale proceeds to cover potential tax liability. That makes it far cleaner for a foreign owner to obtain an ITIN before closing. Buyers want assurance they will not be saddled with unexpected tax obligations, and sellers want to avoid having funds held back at closing.
How to Obtain an ITIN: a Straightforward Process
Applying for an ITIN is a focused administrative process. The most efficient route is to work with a tax professional or Authorized Acceptance Agent who can verify identity documents and submit the application on the investor’s behalf. The typical timeline is about four to six weeks from submission to receipt of the ITIN, though times can vary.
- Gather identification: a valid passport is usually sufficient to establish identity and foreign status.
- Complete Form W-7: this is the IRS form used to request an ITIN. A tax professional can prepare and submit this with supporting documents.
- Submit the application: an acceptance agent verifies the identity documents and forwards the application to the IRS.
- Wait for processing: expect roughly four to six weeks for the IRS to issue the ITIN.
- Use the ITIN: once assigned, the ITIN is used to report rental income, file tax returns, and avoid unnecessary withholding at closing.
Practical Advice for Investors and Agents
- Get the ITIN early. Applying when purchasing a property is the cleanest approach. That prevents holdbacks and confusion later.
- Work with a local professional. An experienced CPA or acceptance agent can verify documents, file paperwork, and explain compliance obligations.
- Keep rental agents informed. Rental managers need the taxpayer identification number to report income properly.
- Plan for selling. If a foreign owner intends to sell eventually, having an ITIN in place avoids the buyer or closing agent withholding funds to cover tax liabilities.
Common Mistakes to Avoid
- Waiting until the closing date to start an ITIN application. Last-minute applications often result in funds being withheld.
- Assuming a foreign passport alone solves reporting requirements. Documentation must be submitted to the IRS via the correct form and process.
- Not verifying who bears withholding responsibility. Buyers should confirm the seller has a taxpayer identification number to avoid unexpected obligations.
Checklist Before Buying or Renting Out a U.S. Property
- Confirm whether the buyer or seller is a nonresident and whether an ITIN is needed.
- If an investor is foreign, apply for an ITIN during the purchase process.
- Provide the ITIN to rental managers and closing companies to ensure proper reporting and to avoid withholding.
- Consult a qualified CPA or acceptance agent to prepare Form W-7 and handle documentation.
Frequently Asked Questions
Who exactly needs an ITIN when buying U.S. real estate?
Nonresident individuals who do not qualify for a Social Security number and who will receive income from or sell U.S. property need to meet ITIN requirements. This includes investors from nearby countries such as Canada and distant regions like Europe or South America.
How long does it take to get an ITIN?
Processing generally takes four to six weeks from the time the IRS receives the application. Working with an acceptance agent can help ensure the application is complete and reduce delays.
Can a buyer be forced to withhold money because the seller lacks an ITIN?
Yes. If the seller is a foreign person without an ITIN, the buyer or closing agent may be required to withhold funds to cover tax liabilities. That is why obtaining an ITIN before closing is important for sellers and reassuring for buyers.
What documents are needed to apply for an ITIN?
A valid passport is the primary document used to prove identity and foreign status. Form W-7 must be completed and submitted with the supporting documentation. An acceptance agent or CPA can verify documents and submit the application.
Can a CPA or acceptance agent help with ITIN requirements?
Yes. A CPA or authorized acceptance agent can handle identity verification, prepare Form W-7, submit the application to the IRS, and advise on tax reporting for rental income and sales. Using a professional simplifies meeting ITIN requirements.
Conclusion
Understanding ITIN requirements protects both foreign investors and buyers. It reduces the risk of funds being withheld at closing, ensures rental income is reported properly, and makes tax compliance straightforward. For anyone investing in U.S. property from abroad, obtaining an ITIN early and working with a qualified professional is a practical step that saves time, money, and stress.
Contact Us Today! |
|
Providing you the experience you deserve! |
| Click me |