On February 7, 2024, the Financial Crimes Enforcement Network (FinCEN) issued a Notice of Proposed Rulemaking (NPRM) to Increase Transparency in Residential Real Estate.
Here is a URL for a Fact Sheet about the Proposed Rule. https://www.fincen.gov/sites/default/files/shared/RRE_NPRM_FactSheet_FINAL_02.06.24_508.pdf
Under the Notice of Proposed Rulemaking, transfers to a legal entity, including a TRUST, corporation, partnership, limited partnership or limited liability company, of residential real estate of up to four units and unimproved land zoned for occupancy by one to four families that don’t involve financing through a financial institution would have to be reported on a Real Estate Report to FinCEN within 30 days or a sale or transfer, and copies kept by the reporting person and other parties for five years.
Note that transactions totally financed using private money mortgages are subject to the reporting requirements.
FinCEN plans to issue a draft Real Estate Report form later during 2024.
FinCEN has identified nonfinanced transfers of real estate to legal entities as suspicious transactions for hiding money laundering schemes.
Certain entities, such as SEC-registered corporations and registered investment companies, would be exempt from the reporting requirement. Most closely-held business entities and trusts, including estate-planning revocable living trusts, would be subject to the reporting requirements.
THAT MEANS VIRTUALLY EVERY ESTATE-PLANNING TRANSFER OF A RESIDENCE TO A REVOCABLE LIVING TRUST WOULD HAVE TO BE REPORTED TO FINCEN! Privacy is an important reason for having a revocable living trust, and that privacy is violated by this reporting requirement.
The obligation to file Real Estate Reports would generally apply to settlement agents, title insurance agents, escrow agents and attorneys. Only one report would have to be filed for a transaction.
The report would have to include:
- The beneficial owners of a transferee entity or transferee trust.
- A description of the entity or trust and its beneficial owners, the real estate being transferred, the transferor, payments made, and the reporting person.
- To be a beneficial owner of a transferee entity, an individual must, directly or indirectly, exercise “substantial control” over the transferee entity, or own or control at least 25% of the transferee entity’s ownership interests. These definitions are similar to those in the Beneficial Ownership Information Report now required for most closely-held business entities.
- The beneficial owner of a transferee trust would be any individual who is a trustee or otherwise has authority to dispose of transferee trust assets, is a beneficiary who is the sole permissible recipient of income and principal from the transferee trust or who has the right to demand a distribution of, or to withdraw, substantially all of the assets of the transferee trust, is a grantor or settlor of a revocable trust, or is the beneficial owner of a legal entity or trust that holds one of those positions.
The small business community is already reeling from the requirement, effective starting this year (2024) to submit Beneficial Information Information Reports to FinCEN. Here’s a URL for details. https://www.fincen.gov/boi
With its “shotgun” approach, FinCEN is treating EVERY CLOSELY-HELD LEGAL ENTITY as suspicious and EVERY NON-FINANCED RESIDENTIAL REAL ESTATE SALE OR TRANSFER to a legal entity as a suspicious activity, when only a tiny fraction of the total actually involves illegal activity, thus violating the privacy of U.S. citizens or others doing business in the United States, without an authorization or “probable cause” for search and seizure, possibly violating Fourth Amendment rights.
Since a final rule hasn’t been issued, there is no effective date for when Real Estate Reports must be submitted. Be alert for when a final rule is issued.
If you object to the growing intrusion of the Federal government into private affairs, write to your representatives in Congress. FinCEN is also accepting comments about the proposed rule up to 60 days after it’s published in the Federal Register.