Opinion: New federal real estate reporting requirements

Stephen F. Aton

The Financial Crimes Enforcement Network, also known as FinCEN, has established a nationwide antimoney laundering reporting framework for certain residential real estate transfers. The reporting requirement became effective March 1. FinCEN is the agency that had required beneficial ownership information reports for entities to be filed annually, under the Corporate Transparency Act, until it was revoked by President Donald Trump. 

This program had already been in place in several cities (referred to as Geographic Targeting Orders) where the risk of money laundering was thought to be greatest. Those areas included certain areas of Florida, New York, California and Texas. The transaction was not reportable unless the value of the transaction was $300,000 or higher. Now, the reporting requirements apply nationwide, and regardless of the value of the transaction, although only an estimated 1 in 10 residential transactions will trigger a filing.

What transfers are reportable?
A transaction is reportable if four conditions are met. First, it must involve a transfer of residential real property, which is defined as one-to-four family homes, condominiums, cooperatives and certain residential development land. Second, the transaction must be nonfinanced, either purchased in cash or received by gift. Transactions involving a loan from a financial institution, such as a bank, credit union or other institution subject to federal oversight, are exempt from reporting requirements. Third, the transferee must be a legal entity or trust, rather than a natural person. This includes corporations, limited liability companies, partnerships and most trust arrangements used to acquire title. Fourth, the transaction must not qualify for one of the rule’s specific exemptions, such as transfers resulting from death, divorce, or other court-supervised proceedings.

It is helpful to note that the following transfers do not require a filing: transfers of commercial property, transfer involving a mortgage, transfers to individuals and certain transfers made for estate planning purposes.

Who has to file the report?
If a transaction meets the conditions outlined above, a real estate report must be filed with FinCEN. The reporting obligation is imposed not on the buyer or seller directly, but on a designated reporting person. The typical reporting person will be a settlement or closing agent, title company, or attorney involved in the transaction. If multiple professionals are involved, the rule applies a functional allocation framework to determine which party bears responsibility for filing.

In a real estate closing, there may be the following parties: buyer’s attorney, seller’s attorney, title company, escrow agent and settlement agent. The framework requires only one party to file, and that is the one that is responsible for handling settlement, preparing closing documents and disbursing the funds. Often, this will be a title company, but it could be an attorney preparing a deed to transfer a qualifying conveyance. In short, you identify the actor performing the reporting function and that is who becomes the responsible filer.

What information is filed?
The reporting person collects and submits detailed information about the transaction to FinCEN. This includes identification of the reporting person, the transferor and transferee, and the property itself, along with transactional data such as the purchase price, or value of the property, and the method of payment. The beneficial owners of the acquiring entity or trust must also be reported. Like under the Corporate Transparency Act, beneficial ownership is defined as any person owning 25% or more of the entity, or one who exercise substantial control over it.

When is the report due?
A qualifying transaction must be reported by the later of either the last day of the month following the month in which the closing occurred or 30 days after the date of closing. All reports must be filed online.

There are significant civil and criminal penalties for noncompliance. As a result, title companies, escrow agents and real estate attorneys must now implement procedures to identify reportable transactions, collect beneficial ownership information and file reports within required timeframes. This introduces additional compliance obligations, increased documentation requirements and potential liability exposure for failure to make a required report.

Stephen F. Aton practices corporate law, estate planning and real estate law and is the owner of Aton Law Firm LLC. He can be reached at steve@atonlaw.com.