FinCEN finalizes rule creating reporting requirements for certain residential real estate transfers

FinCEN finalized a rule that targets illicit finance in the real estate sector and imposes new reporting requirements with respect to certain non-financed residential real estate transactions.

To increase transparency in the U.S. residential real estate sector, the Department of the Treasury's Financial Crimes Enforcement Network (FinCEN) issued a final rule on August 28, 2024 that will require individuals that perform specified closing or settlement functions in reportable residential real estate transactions to report certain information to FinCEN about such transactions (the Real Estate Reporting Rule). ^[1] The Real Estate Reporting Rule follows FinCEN's February 2024 notice of proposed rulemaking that provided the initial proposed reporting requirements for residential real estate transactions (the Proposed Rule).^[2] The Real Estate Reporting Rule will take effect on December 1, 2025.

Importantly, the Real Estate Reporting Rule does not require real estate professionals to maintain comprehensive anti-money laundering and countering the financing of terrorism (AML/CFT) compliance programs. Instead, the Real Estate Reporting Rule requires certain professionals involved in non-financed transfers of residential real property to legal entities or trusts to submit a "Real Estate Report" to FinCEN. The Real Estate Reporting Rule prescribes the information that must be included in the Real Estate Report, which includes details about the transaction, the parties involved and the beneficial ownership of the legal entity or trust that receives the property. Furthermore, the rule provides a process for determining which professional involved in the transfer is responsible for filing the Real Estate Report (reporting persons).

FinCEN made several key amendments to the Proposed Rule in response to public comments. For example, the Real Estate Reporting Rule adopts a reasonable reliance standard that allows reporting persons to rely on information provided by other parties involved in the reportable transfer; extends the reporting deadline to provide reporting persons additional time to file Real Estate Reports; and streamlines the recordkeeping requirements for reporting persons. FinCEN has also released helpful resources for reporting persons, including a Fact Sheet and Frequently Asked Questions.

We provide below a summary of the Real Estate Reporting Rule, including notable changes relative to the Proposed Rule.

Overview of the Real Estate Reporting Rule

The Real Estate Reporting Rule will require "reporting persons" who perform certain closing or settlement functions in "reportable transfers of residential property" to submit Real Estate Reports to FinCEN, reporting specified information about the transfer.

Reportable transfers of residential real property

Under the Real Estate Reporting Rule, "reportable transfers of residential property" are generally defined as (1) non-financed transfers of (2) residential real property (3) to a transferee entity or transferee trust.

Transfers

A "transfer" would generally include any transfer of an ownership interest that is demonstrated through a deed or, for an interest in a cooperative housing corporation, through stock, shares, membership, certificates, or other contractual agreements that evidence ownership. FinCEN has stated that there is no minimum purchase price for a transaction to be reportable and, thus, reporting requirements would apply regardless of whether consideration is exchanged as part of the transfer (e.g., property transferred as a gift). Notably, the Proposed Rule included a list of several exemptions to reportable transfers, which the Real Estate Reporting Rule expanded. As a result, the following transfers, which FinCEN considers common and lower-risk, are not reportable:

• Grants, transfers, or revocations of an easement;
• Transfers 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;
• Transfers incident to divorce or dissolution of a marriage or civil union;
• Transfers to a bankruptcy estate;
• Transfers supervised by a U.S. court;
• Transfers 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;
• Transfers to a qualified intermediary for purposes of a like-kind exchange under Section 1031 of the Internal Revenue Code; and
• Transfers for which there is no reporting person.

"Non-financed" transfers

The Real Estate Reporting Rule defines a "non-financed transfer" as a transfer that does not involve an extension of credit to all transferees that is both: (1) secured by the transferred residential real property; and (2) extended by a financial institution that is subject to the AML/CFT compliance program and Suspicious Activity Report (SAR) filing requirements of the Bank Secrecy Act (BSA) and its implementing regulations. FinCEN notes that reporting companies may be required to report transfers that are financed only by a lender that is not subject to an obligation to maintain an AML/CFT program and file SARs, such as a non-bank private lender. FinCEN also recommends that, in the event reporting persons are unsure as to whether the lending institution involved in the transaction has obligations to maintain an AML/CFT compliance program and file SARs, reporting persons should ask the lending institution. FinCEN reasons that, under the reliance standard, the reporting person may generally rely on information provided by any other person involved in the transaction, including the lending institution (as long as the reporting person does not have knowledge of facts that would call the reliability of the information into question).

Residential real property

Reporting requirements under the Real Estate Reporting Rule only apply to transfers of "residential real property," which is defined as:

1. Real property located in the United States containing a structure designed principally for occupancy by one to four families;
2. Land located in the United States on which the transferee intends to build a structure designed principally for occupancy by one to four families;
3. A unit designed principally for occupancy by one to four families within a structure on land located in the United States; or
4. Shares in a cooperative housing corporation for which the underlying property is located in the United States.

FinCEN states that residential real property includes single family homes, townhouses, condominiums, cooperatives, and apartment buildings. FinCEN also clarifies that residential real property would include property that is partially commercial (e.g., a single-family residence that is located above a commercial enterprise). Finally, FinCEN confirms that reporting requirements would also apply to certain types of land on which a residence has not yet been built (e.g., property zoned for residential real estate).

Transferee entities and transferee trusts

A reportable transfer of residential real property must involve a transferee trust or transferee entity (whether domestic or foreign). A transferee entity is broadly defined to include any person other than an individual or transferee trust. Accordingly, for example, a transferee entity would include corporations, partnerships, estates, associations, and limited liability companies. Notably, the Real Estate Reporting Rule exempts 16 types of entities from the scope of the transferee entity definition (and thus from the scope of reporting requirements). Leveraging the exemptions from the Corporate Transparency Act and Beneficial Ownership Information (BOI) Reporting Rule, exempt entities would include, among others, securities reporting issuers, banks, money services businesses, broker-dealers and subsidiaries of exempt entities.^[3] The Real Estate Reporting Rule, notably, amended the Proposed Rule by removing the term "ownership interests" from the subsidiary exemption, such that a subsidiary that is simply "controlled or wholly owned, directly or indirectly" by an exempt entity does not qualify as a transferee entity. This clarification will be valuable for reporting persons under the Real Estate Reporting Rule, as the subsidiary exemption under FinCEN's Beneficial Ownership Information Reporting Requirements Rule (the BOI Reporting Rule) contains a concept of controlling ownership interests (which FinCEN has yet to define or clarify) that has caused considerable uncertainty among reporting companies as to the scope of the exemption in the BOI reporting context.

A transferee trust is defined as any legal arrangement (domestic or foreign) wherein a grantor or settlor places assets under the control of a trustee for the benefit of one or more beneficiaries or for a specified purpose. Transferee trusts would also include any legal arrangement that is similar in structure or function. FinCEN clarifies that a trust qualifies as a transferee trust regardless of whether the residential real property is titled in the name of the trust or in the name of the trustee. Similar to trustee entities, the Real Estate Reporting Rule exempts the following entities: a trust that is a securities reporting issuer, a trust in which the trustee is a securities reporting issuer, a statutory trust (only because a statutory trust is treated as a transferee entity), and a subsidiary of an exempt trust.

Reporting persons

For each reportable transfer of residential real property, the reporting requirement is the responsibility of one of a small group of persons who fill specified roles in the transfer. The reporting person can be identified in one of two ways: (1) the reporting cascade method or (2) a designation agreement.

Reporting cascade method

The reporting cascade includes a list of seven different functions that a person (i.e., a real estate professional or business) may perform in a sale or transfer of residential real property, with the reporting obligation for any sale or transfer applying to the person that performs a function that appears highest on the list. The reporting cascade includes the below functions in the following order:

1. The person listed as the closing or settlement agent on the closing or settlement statement for the transfer.
2. The person that prepares the closing or settlement statement for the transfer.
3. The person that files the deed or other instrument that transfers ownership of the residential real property.
4. The person that underwrites an owner's title insurance policy for the transferee with respect to the transferred residential real property (i.e., the title insurance company).
5. The person that disburses the greatest amounts of funds in connection with the reportable transfer in any form, including from an escrow account, trust account, or lawyers' trust account.
6. The person that provides an evaluation of the status of the title.
7. The person that prepares the deed or any other legal instrument that transfers ownership (including a stock certificate with respect to shares in a cooperative housing corporation).

FinCEN has clarified that if none of the above functions are performed for a given reportable transfer of real property, then no one is required to file a Real Estate Report.^[4]

Designation agreement

In lieu of using the reporting cascade method, a person that performs one of the functions described in the reporting cascade may choose to enter into a written agreement that designates another person that performs a function described in the reporting cascade as the reporting person. Accordingly, for example, a settlement agent is allowed to enter into a written designation agreement with a title insurance company underwriting the transfer through which the two parties agree that the title insurance company will be the designated reporting person with respect to the transfer.

FinCEN notes that the person that would otherwise be the reporting person must be a party to the designation agreement; however other persons involved in the transfer that may fall into the reporting cascade do not need to be parties to the designation agreement. While there is no required format for the designation agreement, FinCEN clarifies that it must be in writing and identify the date of the agreement, name and address of the transferor, name and address of the transferee entity or trust, the property, name and address of the reporting person, and name and address of all parties to the designation. FinCEN has also clarified that designations are required for each reportable transfer-i.e., reporting persons cannot enter into umbrella designation agreements.^[5]

Finally, the Real Estate Reporting Rule will require all parties to a designation agreement to retain a copy of the agreement for five years; however the reporting person is not required to file the designation agreement as part of the Real Estate Report.

Real Estate Reports

Below we provide a table that provides an overview of the key information that must be included in a Real Estate Report. Reporting persons should review the Real Estate Reporting Rule in detail to ensure that they report the required information, as the reporting requirements are extensive and detailed (in particular, compared to BOI reports submitted pursuant to the Corporate Transparency Act).

Reporting Topic	Required Information
Reporting person	Full legal name Category of the reporting person Street address of the reporting person's principal place of business
Transferee entity	Full legal name Trade name or "doing business as" name (if any) Street address of the transferee's principal place of business[6] Unique identifying number[7]
Transferee trust	Full legal name, such as the full title of the agreement establishing the transferee trust Date the trust instrument was executed Unique identifying number Whether the transferee trust is a revocable trust Certain identifying information for each trustee that is a legal entity[8]
Individual representing the transferee	Full legal name Date of birth Current residential street address Unique identifying number Description of the capacity in which the individual is authorized to act as the signing individual[9]
Beneficial owners of the transferee entity or transferee trust	Full legal name Date of birth Current residential street address Citizenship Unique identifying number[10] Category of beneficial owner (owner or substantial control person)
Transferor (if an individual)	Full legal name Date of birth Current residential street address Unique identifying number
Transferor (if a legal entity)	Full legal name Trade name or "doing business as" name (if any) Street address of the transferor's principal place of business Unique identifying number
Transferor (if a trust)	Full legal name, such as the full title of the agreement establishing the transferee trust Date the trust instrument was executed Unique identifying number Certain identifying information for each trustee[11]
Residential real property being transferred	Street address (if any) Legal description (e.g., section, lot and block) Date of closing[12]
Payment for the property[13]	Amount of payment Method of payment Name of financial institution and account number from which the payment was made (as applicable) Name of the payor on any wire, check or other payment (if the payor is not the transferee entity or transferee trust) Total consideration to be paid

Beneficial owners

With respect to transferee entities, a "beneficial owner" would include any individual who: (1) indirectly exercises "substantial control" over the transferee entity; or (2) owns or controls at least 25% of the transferee entity's ownership interests. Notably, the Real Estate Reporting Rule's definition of "beneficial owner" is consistent with the BOI Reporting Rule.^[14] To assist reporting persons with determining who qualifies as a beneficial owner of a transferee entity, FinCEN refers such persons to its BOI reporting resources, which can be found here.

With respect to transferee trusts, a "beneficial owner" is defined as (1) any individual who is a trustee or otherwise has authority to dispose of transferee trust assets; (2) 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; (3) the grantor or settlor of a revocable trust; or (4) the beneficial owner of a legal entity or trust that holds one of these aforementioned positions. Importantly, FinCEN has not provided guidance under the BOI Reporting Rule as to how reporting companies should determine who qualifies as a beneficial owner of a trust. Accordingly, the guidance provided in the Real Estate Reporting Rule, while dicta, is a critical source of guidance for statutory trust reporting companies.

Reasonable reliance standard

Likely one of the most significant concessions FinCEN grants in the Real Estate Reporting Rule is the adoption of a reasonable reliance standard, which will allow reporting persons to generally rely on information obtained from other persons, absent knowledge of facts that would reasonably call into question the reliability of that information.^[15]

As an example of reasonable reliance, FinCEN expects that a reporting person may rely on the accuracy of a person's address provided orally or in writing, without reviewing government documentation (i.e., driver's license or U.S. passport), as long as the reporting person does not have reason to question the information provided.

It is important to note that the Real Estate Reporting Rule limits the reasonable reliance standard with respect to reporting beneficial ownership information. When a reporting person collects beneficial ownership information from a transferee entity or transferee trust, the reporting person may reasonably rely on information obtained from a transferee or the transferee's representative only if the provider of the information certifies the accuracy of the information in writing to the best of the information provider's own knowledge. The reporting person must retain a copy of the beneficial ownership information certification for five years.

Reporting deadline

In a key change from the Proposed Rule, under the Real Estate Reporting Rule, Reporting Persons will be required to file a Real Estate Report by the later date of either: (1) 30 calendar days after the date of closing or (2) the last day of the month following the month in which the date of closing occurred. Reporting Persons will now generally have between 30 and 60 days to file a Real Estate Report.

Penalties

While the Real Estate Reporting Rule does not specifically list penalties associated with compliance failures, FinCEN notes that applicable penalties are already set forth by statute. Specifically:

• Negligent violations could result in a civil penalty of up to $1,394 for each violation, and an additional civil money penalty of up to $108,489 for a pattern of negligent activity.^[16]
• Willful violations could result in a term of imprisonment of up to five years, a criminal fine of up to $250,000, or both.^[17]
• Violations also could result in a civil penalty of not more than the greater of the amount involved in the transaction (not to exceed $278,937) or $69,733.^[18]

[1] FinCEN, Press Release, FinCEN Issues Final Rules to Safeguard Residential Real Estate, Investment Adviser Sectors from Illicit Finance (August 28, 2024), https://www.fincen.gov/news/news-releases/fincen-issues-final-rules-safeguard-residential-real-estate-investment-adviser. See also FinCEN, FinCEN Residential Real Estate Rule Fact Sheet (August 28, 2024), https://www.fincen.gov/sites/default/files/shared/RREFactSheet.pdf; FinCEN, Frequently Asked Questions on Real Estate Reports (August 28, 2024), https://www.fincen.gov/sites/default/files/shared/RREFAQs.pdf.

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