By Ryan Paul, CPA

On Wednesday, February 7, 2024, the Financial Crimes Enforcement Network (FinCen) proposed a new rule requiring certain professionals involved in real estate closings and settlements to report non-financed transfers of residential real estate to legal entities or trusts.

Why does FinCen care about non-financed transfers?

FinCen Director Andrea Gacki explains this best by quoting “Illicit actors are exploiting the U.S. residential real estate market to launder and hide the proceeds of serious crimes with anonymity, while law-abiding Americans bear the cost of inflated housing prices.  Today marks an important step toward not only curbing abuse of the U.S. residential real estate sector, but safeguarding our economic and national security.”  All-cash sales of residential real estate avoided scrutiny from financial institutions that have requirements under the Bank Secrecy Act to detect money laundering and suspicious activities. In an effort to fly under the radar, bad actors would hide their identities by holding residential real estate in a legal entity or trust. Secretary of the Treasury Yellen remarked at the 2023 Summit for Democracy that “corrupt actors have for decades anonymously stashed their Ill-gotten gains in real estate.  Those looking to exploit our system have been able to (with anonymity) store illicit proceeds in an appreciating asset.”  This proposed ruling would remove that anonymity.

Who is responsible for filing this new report?

Under the proposed rule, there will be a deemed reporting person determined through a “cascading” approach based on the function performed by the person in the real estate settlement and closing.  The individuals most commonly obligated to file this report are settlement agents, escrow agents, title insurance agents and attorneys.  Real estate professionals would have the option to designate a reporting person from those in the cascade.

Is this the same as the Corporate Transparency Act (CTA)?

Information collected under this proposed rule may also be available through the new beneficial ownership reporting requirements as outlined in the Corporate Transparency Act.  However, the CTA and this proposed rule serve different purposes.  This proposed reporting requirement would cover a specific class of activities that the Treasury views as high-risk and justifies reporting on a transaction-specific basis. So, while they are similar, this new ruling is more transaction focused.

What needs to be included in the report filing?

Certain information will be collected and reported to FinCen.  The information required to be included on the report is as follows:

  • Beneficial ownership information for the legal entity (transferee entity) or trust (transferee trust) receiving the property
  • Information about individuals representing the transferee entity or transferee trust
  • Information about the business filing the report (the reporting person)
  • Information about the residential real property being sold or transferred
  • Information about the transferor (e.g., the seller)
  • Information about any payments made

The individual responsible for filing the Real Estate Report would need to file no later than 30 days after the date of closing.  The reporting person is required to keep a copy of the Real Estate Report for five years along with signatures of those involved verifying the accuracy of the information.  There is no threshold for purchase price of the property. The transfers of residential real property includes single-family homes, condos, coops, townhomes and land that is zoned for development.

Are there any real property transactions that are exempt?

Yes, there are certain types of transfers that would be exempt from this filing. Exempted transactions are:

  • Transfers involving easements
  • Divorce
  • Transfers made to a bankruptcy estate
  • Death

The abuse of U.S. residential real estate markets threatens the U.S. economy and national security and disadvantages individuals and small businesses desiring to compete fairly in the marketplace. “All-cash” sales of residential real estate will no longer avoid the scrutiny that is required for financed transactions under the Bank Secrecy Act. The Treasury is mindful of the potential reporting burdens on businesses.  Accordingly, the proposed regulations try to promote much needed transparency while minimizing any compliance burdens. A full Fact Sheet on the Notice of Proposed Rulemaking is available on FinCen’s website.

For inquiries regarding the trends influencing your organization’s real estate decisions, contact Ryan Paul, Partner on PBMares’ Construction & Real Estate team.