Financing methods and ownership structures are under the microscope in a sweeping federal update.
In August 2024, the federal government’s Financial Crimes Enforcement Network (FinCEN) announced a new rule that affects residential real estate that is transferred to a legal entity or trust but is not financed. Once in effect, this will constitute a significant change to the way real estate closings will be held and reported in the future.
The Big Question: “Why?”
The bottom line is that bad actors invest in residential real estate to launder funds and hide their identities, which can lead to distorted housing prices as well as threats to the country’s economy and national security.
According to its website, the mission of FinCen, a bureau of the U.S. Department of Treasury, is “to safeguard the financial system from illicit activity, counter money laundering and the financing of terrorism, and promote national security through strategic use of financial authorities and the collection, analysis, and dissemination of financial intelligence.”
What the Rule Requires
Named the Residential Real Estate Rule, this new rule requires a “Real Estate Report” to be filed with FinCEN and records to be kept regarding “certain high-risk, non-financed transfers of residential real estate property to specified legal entities and trusts.”
The information required to be reported includes, but is not limited to the:
- Name of the reporting person.
- Legal entity receiving ownership.
- Beneficial owner of the trust or legal entity.
- Transferor (seller).
- Property being transferred.
- Total consideration paid.
“Non-financed” residential real property transfers made to a trust or legal entity must be reported, unless there is an exemption. Transfers to an individual do not require reporting. The purchase price and property value are of no consequence in this rule. However, “non-financed” transactions include any financing by a lender that is not required to maintain an Anti-Money Laundering Program (AML) and to file Suspicious Activity Reports (SARs). Therefore, most if not all purchases involving hard money loans and private lending to trusts or legal entities as purchasers would require reporting.
The party responsible for reporting under the rule depends on the nature of the transaction. If a real estate agent represents a party to the transaction, they have the primary responsibility for doing the reporting. If there is no real estate agent involved, then the next responsible party would be the settlement agent (title company). There is a cascading list of responsible parties after that.
Does it apply to all locations within the U. S.?
Yes.
This rule is presently scheduled to go into effect on Dec. 1, 2025.
Your Next Step
As stated, this is a significant change to the real estate closing process. Both the government and the title industry are developing the procedures required to comply with this rule. When you intend to buy a residential real estate property through a legal entity or trust in a non-financed transaction on or after Dec. 1, 2025, contact a trusted law firm or title closing office to ensure you comply with FinCEN’s Residential Real Estate Rule.
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