By JaVonne Phillips, Esq.

McCarthy & Holthus, LLP*

USFN Member (AZ, AR, CA, CO, ID, NV, NM, OR, TX, WA)

The real estate industry will soon be hit with yet another new requirement that, at the moment, will require significant additional work for handling certain residential property transactions.

As discussed at the USFN Briefing held on March 25, 2025, regarding the new Financial Crimes Enforcement Network (FinCEN) rule, panelists from law firms and Auction.com provided insight regarding the key provisions of this rule.

The new FinCEN rule, which will go into effect on December 1, 2025, is aimed at enhancing transparency by requiring reporting of extensive information related to the sales of United States residential properties to domestic and foreign third-party entities or trusts. The goal is to attempt to prevent these types of transactions from being a haven for money laundering, terrorist funding, and other illicit activities.

The requisite reporting includes the nature of the funds provided to purchase the properties. Sales subject to this rule must involve cash-related considerations such as cashier’s checks and money orders. Financed real property transactions were excluded from the reporting requirement given the existing safeguards involved.

The applicable residential properties currently include, but are not limited to, single-family homes, condominiums, townhomes, and mixed-use buildings. The rule also applies to vacant or unimproved land upon which the transferee intends to build up to four residential structures.  Determining such intent may be only one of many possible challenges with attempting to comply with this rule.

The rule requires the gathering of information about the sellers as well as the individuals associated with buying the property for the entity or trust. Such information includes names, addresses, and copies of forms of identification such as driver’s licenses and passports. If multiple individual buyers are involved, then the ones with a 25% or more interest or with a substantial ownership interest must be reported. Note that if an entity purchasing the property is a shell company—100% owned by another entity, then research must be conducted until there is identification of the actual beneficial owner for owners for reporting. The time and expense associated with this task will undoubtedly be significant.

In order to satisfy the reporting requirements a form must be completed. In its current state it has been estimated that the proposed form has no less than 111 data fields with up to 70 of those fields involving information that is not typical of real estate transactions. The time and expense that will be associated with gathering the required information may be another concern regarding the rule. For instance, some of the required information is confidential. Additionally, buyers or potential buyers may not be willing to provide such information. Further, issues could arise if the buyers do not cooperate with providing any or all of the required information.

In any event, the reporting requirements must be satisfied by the last day of the month of the real estate transaction or 30 days after the real estate transaction takes place, whichever is later. The collected information must be securely stored for five years. The ability to timely gather and/or store the required information may present another challenge to those required to report.

There are exceptions and exemptions to the reporting requirements related to legal entity and trust purchasers to whom the FinCEN rule does not apply. The rule does not apply to low-risk transfers due to death, divorce, easement transfers, and transfers to a bankruptcy estate. Also, the rule will likely be inapplicable to judicial foreclosures which have court oversight. Trusts for estate planning purposes are also not subject to the rule. Transactions that occur pursuant to section 1031 of the Internal Revenue Code which regards using funds from a sale to buy another property are also exempt. At the moment, there are no blanket exceptions for attorneys despite the attorney-client privilege.

Considering the enhanced responsibilities described thus far, it may beg the question, “Who is responsible for the required reporting?” Those handling the closing and settlement services of the applicable real estate transactions appear to be undisputed primary reporters. However, in the default servicing world regarding sales pursuant to the non-judicial foreclosure process, the responsible parties seem to be less clear. In general, it may be the party responsible for recording the deed. Assessment in this regard will require a review of the applicable state’s cascade since not all states have the same process. The importance of communication between the relevant, involved parties cannot be stressed enough so that the reporting requirement does not fall through the cracks due to a lack of agreement and understanding regarding who will conduct the reporting. An option that might be helpful for those to whom this rule applies is that a reporter may be designated; however, it must be on a transaction-by-transaction basis. The ability to obtain a blanket designation is not currently permitted.

It will be important to educate and train relevant staff in order to ensure compliance with this FinCEN rule. A failure to comply may result in a $5,000 fine for each day of the violation, up to five years of imprisonment, and/or additional fines for willful violations or patterns of negligent activity. As part of an effort to avoid consequences it may be worthwhile to always exercise good faith, and diligent efforts toward obtaining the required information in the event that there are obstacles such as a lack of buyer cooperation. Other challenges with compliance may occur in jurisdictions where the winning bidder differs from the vesting party; therefore, compliance to the extent possible might be helpful in avoiding negative consequences.

This rule is subject to ongoing changes which may provide hope for less burdensome requirements. For example, days before the USFN Briefing on this topic FinCEN changed another recently implemented rule regarding Beneficial Ownership Information (BOI) reporting to create an exemption for domestic reporting companies and their beneficial owners. Therefore, a similar change could be enacted with respect to the FinCEN rule discussed in this article. A change such as this one would provide welcome relief for the foreclosure realm. Time will tell so this rule should be closely monitored through its December 1, 2025, effective date.

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USFNews - April 16, 2025

* Denotes firm is a 2024 USFN Award of Excellence recipient.