A new federal rule went into effect this month requiring reporting of certain residential real estate transactions involving legal entities and trusts. The rule was issued by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN) as part of a broader effort to combat money laundering and other illegal financial activity conducted through anonymous real estate purchases.
Previously, real estate could be acquired through LLCs or other entities with little transparency regarding the individuals behind the transaction. The new rule is intended to increase visibility into the beneficial owners of entities purchasing residential property.
The rule generally applies when:
- Residential real estate is transferred
- The buyer is a legal entity or trust (such as an LLC, corporation, partnership, or trust), and
- The transaction is not financed through a traditional mortgage lender
The rule primarily targets all-cash residential real estate purchases made through entities. Covered property includes single-family homes, condominiums, townhouses, and small residential buildings with up to four units.
The reporting obligation does not fall directly on the buyer. Instead, FinCEN assigns responsibility to a “reporting person” involved in the closing process, which may include:
- title companies
- escrow agents
- settlement agents
- attorneys involved in the closing
Only one reporting person is required per transaction. Firms that anticipate serving as the reporting party should consider implementing internal procedures for collecting ownership information, verifying the accuracy of that information, and maintaining appropriate records.
The report must include information about:
- the property being transferred
- the parties involved in the transaction
- the entity acquiring the property
- the beneficial owners of that entity
Beneficial owners generally include individuals who own 25% or more of the entity or who exercise substantial control over it. Many investors purchase real estate through LLCs for liability protection and tax planning. Historically, these structures also provided a degree of privacy.
The FinCEN rule reflects a broader regulatory trend toward greater transparency in entity ownership. As a result, investors and business owners should expect increased scrutiny of the individuals behind entities used in real estate transactions.
Real estate professionals, including attorneys, title companies, escrow agents, and settlement agents, should take time to familiarize themselves with the rule and the reporting obligations it creates. As with many new regulatory frameworks, additional guidance from FinCEN is expected as implementation unfolds.