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FinCEN – The wrinkle of cash transactions
Wholesaling Property in New York
June 5, 2018
In March 2016, the Director of the Financial Crimes Enforcement Network (“FinCEN”), U.S. Department of the Treasury, issued a Geographic Targeting Order (“GTO”) requiring title insurance companies in New York, to collect and to report information about the persons involved in certain residential real estate transactions. Particularly, the targeted transactions were those in the borough of Manhattan, specifically those residential properties that sold for cash (without institutional financing), and were purchased by non-individuals (entities such as LLCs or Corporations), for a purchase price of $3 Million or more. The original order was only set to be effective from March 2016 until August 2016, however since then, it has been extended in period and has been expanded in scope.
Most recently, the current FinCEN GTO extended the effective period from February 2017 until August 22, 2017. Furthermore, the GTO expanded its reach, by including residential properties in the boroughs of NYC where the purchase price was $1.5 Million or more. Manhattan remained at $3 Million or more. You may find the actual order by clicking here.
The basic purpose behind the order is to weed out possible money-laundering operations where large amounts of cash are used to purchase real estate by multi-layered entities who seek to hide their true beneficial ownership.
Below we detail some of the requirements and applications of FinCEN in today’s real estate transactions.
· The information required by the GTO is supposed to be collected by the title company insuring the transaction. Together with their underwriter, the title company is called the “covered business”. They utilize IRS form 8300 to obtain and report the information.
· In order for a transaction to qualify ALL the following must be true:
1. Property must be residential (this is defined as 1-4 family properties, including cooperative units and condominium units). Commercial properties and 5+ Multifamily properties are excluded.
2. Property must be in one of the 5 Boroughs of NYC (Kings [Brooklyn], Queens, Richmond, Bronx or New York [Manhattan])
3. The purchase price must be $1.5 Million or more, if the property is in Kings, Queens, Richmond or Bronx Counties. The purchase price must be $3 Million or more, if the property is in New York county [Manhattan]. If the transaction qualifies, the reporting agent will collect and report detailed information about every instrument (certified/business or personal check, or money order) that was used in the transaction. NOTE: Wire transfers can be considered exempt from FinCEN reporting if they meet certain criteria.
4. The purchase must be made without any loan or similar financing. NOTE: If the purchaser secures private financing, it may not exempt the transaction from FinCEN reporting, unless the lender is considered a U.S. financial Institution, with their own anti-money laundering policy.
5. The purchaser must be an entity such as a LLC, Corporation, Partnership etc. Individual purchasers are exempt. The reporting agent shall obtain the names and Social Security Numbers, or Tax Identification Numbers of every beneficial owner that is an individual and that owns more than 25% of the equity interests in the purchasing entity.
The new FinCEN regulations may present hurdles or slow down the process of purchasing property in New York, so prospective purchasers are advised to obtain legal representation proficient in handling FinCEN issues. Here at Annunziata & Asllani, having been closed numerous FinCEN eligible transactions, we are able to guide our clients through the FinCEN process, early in the transaction, so they can take the necessary steps to be prepared for complying with the requirements of FinCEN. We also love to guide our Real Estate professionals, on the subject of FincCEN, so they may properly structure their transactions from the start. Give us a call today to discuss your potential transaction.
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