FinCEN Reporting and the Residential Rule

Topics Covered

FinCEN BOI Regulation under the CTA

The Residential Rule in Real Estate

Exemptions to the Residential Rule

CTA Enforcement and Penalties

FinCEN Beneficial Ownership Reporting

In enforcing the Corporate Transparency Act (31 U.S.C. Sec. 5336), FinCEN promulgated sweeping beneficial ownership information reporting rules (BOI rules, now suspended, found at 31 CFR Part 1010 et  seq.) upon everyone who forms an LLC, corporation, or other registered entity in any state. This was a huge change to the practice of entity formation in the United States. According to FinCEN:

Illicit actors frequently use corporate structures such as shell and front companies to obfuscate their identities and launder their ill-gotten gains through the U.S. financial system. lack of transparency [as to true beneficial owners] creates opportunities for criminals, terrorists, and other illicit actors to remain anonymous while facilitating fraud, drug trafficking, corruption, tax evasion, organized crime, or other illicit activity through legal entities in the United States.

FinCEN’s complex regime imposed reporting duties on company applicants and persons including senior officers of reporting companies, beneficial owners, and any person who directly or indirectly owned at least a 25% interest in a state-registered entity or otherwise exercised substantial control the entity. Any attempt to conceal such persons from FinCEN or avoid BOI reporting would have been a serious violation.

FinCEN’s ultimate goal was to deputize all transactional gatekeepers—title insurance companies, real estate agents and brokers, law firms, settlement and closing agents, and others who collect information and maintain records regarding non-financed (cash) purchases of real estate. Such intrusive self-reporting would have been a significant burden upon ordinary people who form new businesses and engage in real estate transactions, not just lawyers, accountants, and title professionals.

Public and political reaction was swift and defiant, and BOI reporting requirements have (for now) been suspended as to entities formed in the U.S., although they still apply to foreign entities:

March 21, 2025. FinCEN Removes Beneficial Ownership [BOI Information] Reporting Requirements for U.S. Companies and U.S. Persons

The Financial Crimes Enforcement Network (FinCEN) is issuing an interim final rule that removes the requirement for U.S. companies and U.S. persons to report beneficial ownership information (BOI) to FinCEN under the Corporate Transparency Act. In that interim final rule, FinCEN . . . exempts entities previously known as “domestic reporting companies” from BOI reporting requirements. Thus, through this interim final rule, all entities created in the United States—including those previously known as “domestic reporting companies”—and their beneficial owners will be exempt from the requirement to report BOI to FinCEN. Foreign entities [must still ] report their BOI to FinCEN under new deadlines, detailed below. These foreign entities, however, will not be required to report any U.S. persons as beneficial owners, and U.S. persons will not be required to report BOI with respect to any such [foreign] entity for which they are a beneficial owner. FinCEN is [currently] accepting comments on this interim final rule. . . .

FinCEN BOI reporting rules were among the least business-friendly regulation regimes ever seen in the United States. Although suspended for the moment, it is prudent for a real estate investor to keep on eye on this subject. Advocates of radical transparency in business formation and real estate transactions will inevitably attempt to bring the BOI rules back.

New FinCEN Residential Rule

Notwithstanding its rollback of BOI regulations in entity formation, FinCEN is still on track to expand its regulatory and data-collection efforts in residential real estate transactions. The Final Rule to Increase Transparency in Residential Real Estate Transfers (the residential rule) is scheduled to take effect on December 1, 2025.

The details of the residential rule are evolving quickly. FinCEN will be including a new sub-part to Chapter X of the Code of Federal Regulations for this purpose. For now, much of the best information on the residential rule is available on the FinCEN website.

FinCEN’s website states that its objective is to focus on residential cash transactions:

Illicit actors often favor non-financed transfers (including “all-cash” sales) of residential real estate to avoid scrutiny from financial institutions that have anti-money laundering and countering the financing of terrorism (AML/CFT) program and Suspicious Activity Report (SAR) filing requirements under the Bank Secrecy Act. Illicit actors also often hold residential real estate in the name of a legal entity or trust, in an effort to obscure their identities and their ownership interests in the property.

Transfers that are both non-financed and involve a transferee that is a legal entity or trust are of higher risk for money laundering and make the proceeds of crime and their owners more difficult to track and identify. The reporting of these transfers [by means of the Residential Rule] will help curtail the anonymous laundering of illicit proceeds through the purchase of residential real property which threatens U.S. economic and national security.

This rule will address the demonstrated need for increased transparency and work to deter illicit use of the U.S. residential real estate market.
In this context, SARs will be called real estate reports.

Scope of FinCEN’s Residential Rule

Reportable transfers must be reported to FinCEN by a reporting person when they meet the following criteria:

(1) the property is residential real property including unimproved land;

(2) the transfer is non-financed (i.e., consideration is paid in cash);

(3) the property is transferred to a legal entity (such as an LLC) or investor land trust; and

(4) an exemption does not apply.

Transfers meeting the rule’s requirements must be reported regardless of purchase price or the value of the property. Cash and gift transfers are therefore clearly subject to the rule. However, transfers made directly to an individual are not covered.

Transfers that are financed solely by a non-institutional lender that does not otherwise have an obligation to maintain a BSA/AML program and file SARs (this would include private hard-money lenders as well as individual sellers engaging in owner finance) are included in the definition of non-financed transfers and are subject to reporting requirements unless an exemption applies.

Exemptions to the Residential Rule

Exemptions are provided for certain transfers that FinCEN considers to be lower in corruption risk, including:

(1) transfer of an easement;

(2) transfer 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;

(3) transfer incident to divorce or dissolution of a marriage or civil union;

(4) transfer to a bankruptcy estate;

(5) transfer supervised by a court in the United States;

(6) transfer 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;

(7) transfer to a qualified intermediary for purposes of a like-kind exchange under Section 1031 of the Internal Revenue Code; or

(8) transfer for which there is no reporting person.

Who is a reporting person?

A reporting person has an obligation to make a report concerning a reportable transfer if he, she, or it is part of the reporting cascade, a defined term that consists of a list of different closing-related professional functions (conducting the closing, preparing the closing statement, disbursing funds, recording documents, or preparing documents, all in descending order). Signing individual refers to the person who signs closing documents on behalf of the transferee.

FinCEN’s intention is to include as reporting persons all settlement agents, title insurance agents, escrow agents, and attorneys who do real estate closings. However, there is only one reporting person for any given reportable transfer. In most cases in Texas this will be the title company that closes the transaction. If an attorney closes the transaction in the office, then the attorney will be responsible for reporting to FinCEN.

What information must be reported?

Personal identifying information on both transferor and transferee (sellers and buyers) must be reported along with a description of the property and the consideration paid.

Required information on the transferee includes the name of the legal entity or trust receiving ownership of the property; the EIN or social security number; the beneficial owners (i.e., persons owning a 25% or greater interest or exercising substantial control) of the transferee entity or trust including their residential addresses; and the name of the authorized person who executes documents on the behalf of the transferee (the signing individual).

A reporting person may exercise reasonable reliance on information provided by others (i.e., the beneficial owners) so long as there is no reason to believe that it is unreliable. Reports must be filed by the later of either the final day of the month following the closing or 30 days after the date of closing.

Impact of Residential Rule on Trusts

FinCEN’s expansion into the realm of trusts is significant. A trust agreement is a private document that need not be filed or recorded anywhere. Trusts are not registered entities created by paying a filing fee to the state. As a result, trusts, including those that hold real estate, have traditionally enjoyed a high degree of confidentiality.

However, under present rules, a trust must be reported as a beneficial owner of an entity if it exercises substantial control or own 25% or more of a registered entity such as an LLC. This is further explained in the section below that addresses FinCEN reporting in entity formation.

What now is the obligation of trusts (and their participants) when it comes to the Residential Rule? FinCEN is clear that trusts are not considered to be individuals who are exempt from reporting, so reporting by trust participants (trustor, trustee, and beneficiary) may, depending on the circumstances, be required. This is the case regardless of whether residential real property is titled in the name of the trust itself or in the name of the trustee on behalf of the trust.

Penalties for CTA Violations

In promulgating the residential rule, FinCEN is exercising its authority to implement the Corporate Transparency Act. Thus CTA penalty provisions must be considered. Violations fall into two general categories: first, reporting violations, including failure to report and false or fraudulent reporting; and second, knowing and unauthorized use or release of beneficial ownership information.

As to reporting violations: “It shall be unlawful for any person to willfully provide, or attempt to provide, false or fraudulent beneficial ownership information, including a false or fraudulent identifying photograph or document, to FinCEN in accordance with this section, or to willfully fail to report complete or updated beneficial ownership information to FinCEN in accordance with this section” (31 CFR Sec. 1010.380(g)). Elements of the offense are:

(1) the person or entity is a reporting company that is required to report;

(2) there is a failure to report to FinCEN; and

(3) a person causes the failure to report or is a senior officer of the reporting company at the time.

Reporting violations (including false reports and failure to file or update FinCEN reports) can result in a fine of $500 per day up to $10,000 and/or up to two years in federal prison (31 U.S.C. Sec. 5336(h)(2) and (3)(A)).

Violations relating to knowing misuse or unauthorized release of beneficial ownership information are harsher and can result in the same daily fine up to $250,000 and/or a prison term of up to ten years (31 U.S.C. Sec. 5336(h)(2) and (3)(B)).

Asset Forfeiture

The arbitrary forfeiture of citizen assets by law enforcement (including FinCEN) is out of control in the United States. Confiscating cash, vehicles, guns, and houses from potential defendants and suspects (persons who not even been sued or charged with a crime) is the main financial lifeline for many police and sheriffs’ departments across the country. These practices resemble the confiscatory practices of third-world authoritarians and clearly violate the 14th Amendment due-process clause. To their shame, American courts continue to look away.

FinCEN is prepared to take forfeiture to the next level as it continues to try to expand its power. Federal law (18 U.S.C. Section 981) allows the U.S. Treasury to seize any property, real or personal, involved in a transaction involving money-laundering. In its 2021 NPRM, FinCEN literally boasts that previous forfeitures have yielded “luxury properties in New York City, Los Angeles, Beverly Hills, and London, mostly titled in the name of shell companies, as well as paintings by Van Gogh, Money, Picasso, a yacht, several items of extravagant jewelry, and numerous other items of personal property.” An Orwellian theme is apparent: in your hands, these things are extravagant; but by transferring them to the government, the result is justice.