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ITIN changes present implications for US real estate and foreign investment partners

U.S. real estate firms that have partnered with foreign investors should be sure to follow compliance updates from the IRS related to ITINs.

The Protecting Americans From Tax Hikes Act of 2015, and the subsequent Technical Correction Act of 2016, presented specific changes to issuance of individual's taxpayer identification numbers (ITINs).  The changes have implications for nonresident aliens who invest in American real estate, as well as their U.S. investment partners.

The legislation introduced new clarification on the approval, renewal and expiration of ITINs for non-American individuals living abroad who wish to obtain ITINs for purposes of meeting their U.S. tax filing obligations and receiving federal tax returns, when applicable.

ITIN renewal schedule
Under the PATH act, anyone with an ITIN issued prior to 2013 must renew their ITIN between 2017 and 2020 on a staggered scheduled as specified by the IRS. These ITINs will also expire if the individual does not file a tax return for three consecutive years. The provision will be in effect for all ITIN requests made after the enactment date of the PATH Act – Dec. 18, 2015.

Under the IRS schedule, ITINs issued before 2013 will expire as follows:

  • Issued prior to 2008: January 1, 2017
  • Issued in 2008 : January 1, 2018
  • Issued in 2009-2010: January 1, 2019
  • Issued in 2011-2012: January 1, 2020

Under this schedule, nonresident aliens who obtained their ITIN before 2008 must now renew it with their 2016 tax return or the ITIN will expire. ITINs issued after December 31, 2012 will need to be revalidated every five years. In turn, if an individual obtains an ITIN but does not use it for three consecutive years, it will expire, at which point it will also have to be revalidated. Without the ITIN, foreign investors will not be able to file their taxes or receive any refunds they are entitled to, which can represent a significant financial loss and discourage continued involvement with U.S. real estate firms, which often rely on foreign investment partners to grow their businesses.

"The changes have implications for nonresident alien who invest in American real estate, as well as their U.S. investment partners."

The PATH Act also presented changes for financial organizations that have nonresident alien IRA owners or beneficiaries and must gather ITIN numbers for federal withholding or IRA distributions in accordance with tax treaty benefits. A PATH provision requires ITINs issued solely for the purpose of claiming tax treaty benefits to be distinguished from other ITINs.

Ensuring ITIN renewal compliance
Guidance on the renewal process for ITINs is still forthcoming from the IRS. Therefore, it's important for nonresident aliens and their U.S. investment partners to stay in communication with their CPAs and follow up for updates. As foreign investors are often understandably less familiar with U.S. tax law, it is important for their U.S. partners to follow compliance updates closely and communicate any actions that need to be taken.

The tax professionals at LaPorte CPAs and Business Advisors have the experience and knowledge to guide our clients through the compliance process and help U.S. real estate firms to evaluate their ITIN issuance date and determine whether they need to renew their ITIN.

The professionals at LaPorte have experience working with foreign-owned entities on both inbound and outbound transactions and can provide insightful guidance to all our clients affected by PATH Act changes.