Vol. 43 - December 2024 | ©2024 by Vidal, Nieves & Bauzá, LLC. All rights reserved.
In August 2024, the U.S. Department of Treasury’s Financial Crimes Enforcement Network (“FinCEN”) issued a Final Rule regarding new recordkeeping and reporting requirements in connection with certain transfers of residential real estate, set to take effect on December 1, 2025 (“Final Rule”). Under the Final Rule, specific real estate professionals must report details to FinCEN regarding non-financed residential property transfers involving legal entities or trusts, identified as high-risk for illicit financial activity. This regulation aims to enhance transparency, restrict opportunities for anonymous laundering of illegal funds within the U.S. housing market, and support law enforcement in tracking and investigating financial crime.
WHAT QUALIFIES FOR REPORTING?
The Final Rule states that transfers of real property must be reported when: (1) the property is residential real property; (2) the transfer is not financed; (3) does not qualify for an exemption; and (4) the property is transferred to a legal entity or trust.
Transfers that meet all criteria must be reported regardless of the value of the property or the purchase price. Thus, a gift of residential real property is subject to reporting.
According to FinCEN, reportable properties involve transfers concerning single-family homes, townhouses, condominiums, cooperatives, apartment buildings, vacant or unimproved land on which a residential structure is intended to be built, and single-family residences located above commercial establishments.
APPLICABLE TO WHOM?
The Final Rule is required solely for transactions where a covered entity or trust, including foreign entities and trusts, is the new owner. Therefore, transfers made directly to an individual are not subject to the Final Rule.
WHAT TRANSFERS ARE EXEMPT?
The Final Rule provides low-risk transfers to be exempted, such as:
a transfer of an easement;
a transfer resulting from the death of an individual, whether pursuant to the terms of a decedent’s will or the terms of a trust, the operation of law, or by contractual provision;
a transfer incident to divorce or dissolution of a marriage or civil union;
a transfer to a bankruptcy estate;
a transfer supervised by a court in the United States;
a transfer made for no consideration by an individual, either alone or with their spouse, to a trust of which that individual, their spouse, or both of them, are the settlor or grantor;
a transfer to a qualified intermediary for purposes of a like-kind exchange under Section 1031 of the Internal Revenue Code; and
a transfer for which there is no reporting person.
WHO HAS THE RESPONSIBILITY TO FILE THE REPORT?
Under the Final Rule, "reporting persons" involved in the closing of reportable transfers of residential property must submit certain information about the transfer to FinCEN. FinCEN suggests that the responsibility for filing reports will generally fall on settlement agents, title insurance agents, escrow agents, and attorneys. Additionally, only one person will act as the reporting party for each reportable transfer.
However, the Final Rule provides that the determination of the reporting person can occur by either of the following two ways: (1) a reporting cascade, or (2) by mutual agreement among real estate professionals.
The Reporting Cascade refers to a hierarchical approach which assigns the reporting obligation to the real estate professional performing the highest-ranking function from a predefined list of seven roles involved in a residential property transfer. For instance, the first function on the list is the professional identified as the agent on the closing or settlement statement. If no such professional is involved, the obligation shifts to the next function on the list, continuing down the hierarchy until the appropriate reporting party is identified.
To allow flexibility, the professionals performing roles listed in the reporting cascade may enter into a written agreement designating the person who will be the reporting person for a given transfer.
WHEN MUST THE REPORT BE FILED?
The transfer must be reported by the later date of either:
the final day of the month following the month in which the reportable transfer occurred; or
30 calendar days after the date of closing.
WHAT INFORMATION MUST BE SUBMITTED BY THE REPORTING PERSON?
Pursuant to the Final Rule, a reporting person must supply information identifying the following details regarding the transfer of residential real property:
The reporting person;
The legal entity (transferee entity) or trust (transferee trust) receiving ownership of the property;
The beneficial owners of the transferee entity or transferee trust;
Certain individuals signing documents on behalf of the transferee entity or transferee trust during the reportable transfer;
The transferor (e.g., the seller);
The residential real property being transferred; and
Total consideration and certain information about any payments made.
RECORDKEEPING REQUIREMENT
In addition to the reporting requirement, the reporting person is also subject to recordkeeping requirements limited to the retention of a copy of any beneficial ownership certification form provided and a copy of the designation agreement, for a period of 5 years.
PENALTIES FOR NOT COMPLYING WITH THE FINAL RULE
The Final Rule does not authorize the filing of incomplete reports, and a reporting person who fails to report the required information about the reportable transfer may be subject to the general civil and criminal penalties set forth in the Bank Secrecy Act. These may include sanctions such as: $1,394 for each "negligent" violation; up to $108,489 for a pattern of negligent violations; up to $69,733 for each "willful" violation; and criminal penalties can include up to five years of imprisonment and a fine of up to $250,000.
Should you or your company have any questions regarding the above case or any other commercial area of the law on which you may have an inquiry or require advice, you may contact the attorneys at Vidal, Nieves & Bauzá, LLC, at info@vnblegal.com a corporate law firm with special emphasis on energy and environmental matters, corporate, tax, transactional, real estate and insurance practices. Feel free to browse our webpage at www.vnblegal.com.
Vidal, Nieves & Bauzá is located at Suite 110, T-Mobile Center.
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