In an effort to combat money laundering, the U.S. Treasury Department requires additional disclosures in certain types of real estate transactions. First passed in March 2016, the disclosure requirements apply to a non-individual (corporation, LLC or partnership) who purchases a residential property for “all cash.” The rules were recently renewed and apply at least through August of this year. The pertinent provisions of the rules include the following:

What to disclose

In transactions that fall under the rules, the identities of all LLC members, and those shareholders or partners who own at least 25% of the entity purchasing the real property need to be disclosed.

When disclosure is required

The disclosure requirements set forth in the Treasury Department’s Geographic Targeting Order (“GTO”) apply only to transactions in New York City and in areas of California, Texas and Florida. In Manhattan, disclosure must be made with respect to transactions with a purchase price of at least $3 million; while in the rest of New York City (Bronx, Brooklyn, Queens and Staten Island), it only applies to purchase prices of at least $1.5 million.

The rules cover purchases of one to four-family homes, including condominiums and cooperative apartments. They are only applicable when there is no financing from a bank, credit union or mortgage company being used to pay at least a portion of the purchase price. There does not appear to be a minimum percentage of the purchase price which must be financed, meaning that the entity making the purchase can finance a relatively small portion of the total price to avoid triggering the reporting requirements. Trusts also seem to be exempt from the reporting requirements.

How to disclose

IRS Form 8300 must be completed by the title company, or if there is no title company involved, the Seller’s attorney handling the transaction. The form must be electronically filed within 30 days of the closing of the transaction. The filer must retain the records utilized in preparing the form for at least five (5) years from the date of filing.

Required information generally includes a copy of the government-issued ID of the principal signing on behalf of the entity and identifying information for each member of an LLC, and for each shareholder or partner owning at least 25% of the purchaser.

Penalties

There are both civil and criminal penalties for non-compliance, including hefty fines and possible jail time (although given the relative newness of the requirements, there are no reported enforcement actions yet to comment upon). The criminal penalties for non-compliance can be assessed at any time within six (6) years from the date of the transaction and civil actions may be commenced within two (2) years of the date of the penalty or criminal conviction. It also appears that the penalties will be imposed upon either the title company or the attorney who should have filed the required form, so these parties should be especially diligent in requiring the parties to the transaction to provide all required information in order to complete the form.

Avoiding disclosure

It seems that one way to protect the anonymity of the principals of the purchasing entity is to finance even a small portion of the purchase price. Additionally, as noted above, taking title to the real property in the name of a trust will not trigger the reporting requirements.

Finally purchasing the property in the name of an individual and then making a transfer to an entity for no money or other consideration appears to be another way around the rules. Arguably, the principals of the entity “buying” the property for no money in the second transaction would not have to be revealed, although if it turns out the title company or attorney should have filed the disclosure form and didn’t, they risk the imposition of significant penalties.

Parties considering becoming involved in an all cash NYC transaction should err on the side of caution and consult with experienced real estate counsel regarding their disclosure and other obligations.

 

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This post does not constitute legal advice or establish an attorney-client relationship.