LLCs buying houses with cash now must comply with new reporting law

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Persons using a limited liability company (LLC) as the owner of record for houses and small rental properties must now disclose names of involved parties when paying cash for the properties.

If single family homes or rental properties with one to four units are purchased with cash, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) now requires names, addresses and employer identification numbers for anyone owning at least 25 percent of an LLC or anyone with control of the LLC.

The law went into effect on March 1 and is the latest attempt to deter illicit schemes that involve the U.S. housing market.

“This rule is specifically intended to fight against money laundering,” said attorney Robert Rowe, senior associate at Lippes Mathias LLP. “Bad characters use opaque legal structures and trust structures to anonymously buy homes with dirty money.”

Not only are those bad actors using the proceeds from illegal activities to buy real estate, they’re exacerbating the ongoing shortage of housing on the market. The average homebuyer can’t compete with criminal enterprises, and homes bought with drug money mean fewer properties available for families.

“These illicit transactions, they’re not just bad for the overall economy and folks’ safety, it’s also the fact they distort markets and disadvantage legitimate buyers,” Rowe said. “You have money flowing in that frankly shouldn’t be in the normal market and isn’t for the purpose of buying someone’s home.”

The federal government is attempting to put an end to the practice by requiring persons with beneficial ownership in an LLC to provide their identity, address and more.

The law applies only to cash transactions of properties single-family and small rental properties as well as land that a buyer intends to use for a house. The reporting requirements also apply to cash transactions involving a portion of a condominium or shares in a co-op.

It would not involve transactions where an individual buys a property in his or her name and then transfer the property into their business entity. Why? The name of the owner has already been recorded when the property was purchased.

But FinCEN says if you owned a property before the new reporting requirements went into effect and now transfer the title to your LLC for asset protection, disclosure is necessary.

The law does not pertain to homes purchased with traditional bank financing because the issuer of that debt – the bank that holds the mortgage – is already subject to anti-money laundering and suspicious-recording requirements.

So, who must file the actual paperwork? It’s not the real estate agents, the buyer or the seller.

“This doesn’t really impact Realtors,” Rowe said. “There’s a reporting cascade. It starts with the settlement agent, because they’re in the best position to know who’s who; they ultimately determine where the property’s going.

“If the settlement agent can’t do it or they don’t exist, then it goes to the preparer of the settlement statement. In most cases you would have a settlement statement because that’s how parties agree on a price and ultimately how closing costs are distributed. Then comes the filer of the deed. Then title insurance underwriters.

“No where in there are Realtors. They were specifically carved out.”

The reporting person must provide the full legal name of the buyer(s), the trade name of the business, the total considering paid, current street address, unique identification number (for a U.S.-based entity, their federal EIN ). That information is required for all beneficial entities of the LLC, Rowe said.

The reports must be filed by the final day of the month following the transfer. For instance, if a deed was recorded on March 24, the LLC documents must be filed by April 30.

Penalties are stiff. For a negligent violation, the person responsible for reporting the sale is subject to a civil penalty of up to $1,394 for each violation. A penalty of up to $108,489 can be imposed if there is a pattern of negligent activity.

Willful violations could result in up to a year in prison and a fine of up to $250,000, or both.

“I wouldn’t want to be on the wrong side, put it that way,” Rowe said.

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