The U.S. Treasury Financial Crimes Enforcement Network (FinCEN) has finalized a new Residential Real Estate Rule (RRER) that requires the reporting of certain “non-financed” transfers of residential real estate where the purchaser is a legal entity or trust. This new reporting requirement begins March 1. FinCEN has stated that the RRER “is designed to increase transparency in the U.S. residential real estate sector and to combat and deter money laundering.”
Property covered by this new rule includes one-to-four-family residences, condominiums, cooperatives, and vacant land where the buyer intends to build a one-to-four-family structure.
The RRER does not have a minimum purchase price and does not have geographic limitations within the U.S. or its territories. The RRER defines a reportable “non-financed” transaction as one that does not involve an extension of credit to all transferees that is both (1) secured by the transferred property and (2) extended by a financial institution subject to anti-money-laundering program requirements and suspicious activity reporting obligations. Therefore, all-cash purchases by an entity of qualifying residential property, as well as purchases financed only by private (nonbank) lenders or sellers, would be reportable. The RRER provides a set of narrowly defined exempted transfers, including certain transfers by reason of death, divorce, court supervision, or bankruptcy and transfers to qualified intermediaries in Section 1031 exchanges.
Unlike FinCEN’s Corporate Transparency Act, the RRER places the reporting obligation on a real estate professional involved in the closing, not on the buyer or the seller. The “reporting person” is determined by a regulatory reporting cascade, which establishes a seven-level priority list and makes the person listed as the closing or the settlement agent on the closing or settlement statement first responsible to report unless another party in the reporting cascade is designated by written agreement. If an otherwise-reportable transaction does not have a reporting person, then filing a report is not required.
A single report is required per deed, and reports must be filed electronically via FinCEN’s online portal after closing by either of the following dates, depending on which is later: the final day of the month following the month when the closing occurred or 30 calendar days after the date of closing.
The report includes information about the property, the transaction, the buyer and the seller, and payment sources, as well as, more importantly, beneficial ownership information for the purchasing entity or trust. A reporting person pursuant to the reporting cascade may rely on information certified by the buyer or the seller unless they have reason to question its accuracy.
The RRER is an expansion of anti-money-laundering enforcement and an increase in transparency of purchasing entities or trusts. For a purchasing entity, a beneficial owner includes individuals who exercise substantial control over the entity or own or control at least 25% of the entity. For trusts, reporting may be required for trustees, grantors, or settlors who have revocation rights of the trust and for certain beneficiaries with withdrawal rights, depending on the trust structure. Although FinCEN allows reasonable reliance on certified information, the rule anticipates expanded information gathering at or before closing and expressly contemplates that failure to provide required information may delay or prevent closing. Persons using entities or trusts in all-cash or privately financed residential transactions should plan for additional disclosures, documentation, and timing considerations. Failure to file a required report under the RRER may result in significant civil and potential criminal penalties for noncompliance.
