Takeaways
- FINCEN’s final rule (RRE Rule), effective December 1, 2025, will require disclosure of the transferor and transferee(s) and the individuals and the beneficial owners of entities involved as transferee in the transfer of residential real estate or land which is intended to be developed or used for residential real estate, excluding transfers solely to individuals.
- The RRE Rule is limited to transactions of property designed for one-to-four family occupancy, or land acquired with that intent, and in which no mortgage financing is provided by a financial institution(s) subject to Anti-Money Laundering and Suspicious Activity Report reporting obligations.
- Reporting is to be made by a U.S.-based designated real estate professional involved in the closing.
On August 28, 2024, the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) issued a final rule (RRE Rule) creating a reporting regime for transfers of residential real estate. This RRE Rule, proposed in preliminary form on February 16, 2024, supplements FinCEN’s current General Targeting Order (GTO) program for reporting of such transactions but is quite different in approach and scope. Unlike the GTO, it applies on a nationwide basis and without a floor amount of consideration.
The new RRE Rule is also different than, but uses concepts created under, the Corporate Transparency Act (CTA), which was enacted by Congress and is also part of the Bank Secrecy Act (BSA). FinCEN issued a Final Rule implementing the CTA approximately two years ago that came into effect on January 1, 2024. Unlike the CTA, the information collected under the RRE Rule is not required to be maintained in a segregated, non-public database.
The RRE Rule expands the list of entities that qualify as “financial institutions” under the BSA. Financial institutions have more extensive obligations under the BSA than many other types of entities. The RRE Rule defines certain entities involved in residential “real estate closings and settlements” as financial institutions. FinCEN has also indicated that it may issue another rule to govern commercial real estate transactions. Separately, Congress is considering legislation known as the “Enablers Act,” which would further cause lawyers, law firms, accountants, art galleries and many others to be treated as “financial institutions” under certain situations. The scope and application of the BSA continues to expand.
FinCEN has provided a set of FAQ’s that set out many of the material terms of the RRE Rule, plus over 130 pages of commentary. We set out below a high-level analysis of the RRE Rule, but caution that there are complexities and nuances that must be carefully considered and may cause confusion and increase expenses, particularly in an area where transaction size may be small and some participants may be unsophisticated.
As noted, reporting is required for a transfer by deed (or related instrument for a co-op) in a transaction, regardless of the amount of consideration (that is, no floor and including certain gifts but exclusive of certain trust arrangements), where (i) one-to-four family real estate (including units in a condominium or co-op apartments), or property intended to be developed as one-to-four family real estate, is being conveyed, even if the condo or co-op building is partly commercial or otherwise non-residential, and (ii) mortgage financing for a portion of the acquisition cost is not being advanced to the entire purchasing group by a financial institution subject to Anti-Money Laundering (AML) or Suspicious Activity Report (SAR) reporting (to comply, mortgage financing must be extended to all of the transferees). Units in a planned unit development or similar horizontal residential subdivision (PUD) and land suitable for conversion to a PUD likely would be covered as well. Most transactions with seller or friendly financing, and some non-traditional lending, will have to be reported, as will most transfers to a subsidiary or affiliated company. Presumably, transfers of equity interests in entities that own real property would be handled under the CTA.
Some transactions are deemed non-reportable: easements, certain transfers upon death or in connection with a divorced or other marriage dissolution, transfers to a bankruptcy estate or supervised by a court, certain transfers made by an individual solely or together with a spouse to a trust as to which they are settlor(s) or grantor(s), or where there is no reporting person. This list is not exclusive.
Transferee trusts must also be reported where a grantor or settlor places assets with and under control by a trustee for beneficiary(ies). However, exemptions are granted to (i) a securities reporting issuer, (ii) a securities reporting issue acting as trustee, (iii) a statutory trust and (iv) a subsidiary of any of the foregoing.
To be a reportable transaction, a transferee must be an entity other than a transferee trust or an individual(s). If one transferee must be reported, any other transferee (e.g., any individual) must be reported, but their personal information is not required. There are 16 exemptions, mostly for large and well-regulated institutions or their subsidiaries. These 16 exemptions are for:
- securities reporting issuers,
- governmental authorities,
- banks,
- credit unions,
- depository institution holding companies,
- money services businesses,
- brokers or dealers in securities,
- securities exchanges or clearing agencies,
- other Exchange Act registered entities,
- insurance companies,
- state-licensed insurance producers,
- Commodity Exchange Act registered entities,
- public utilities,
- financial market utilities,
- registered investment companies, and
- subsidiaries of an exempted entity.
Although some of these exemptions track exemptions from the CTA, several important exemptions under the CTA, such as the large operating company and not-for-profit company exemption are not carried over into the RRE Rule. Those who are potentially subject to the RRE Rule will need to closely analyze the scope of the exemptions to determine whether any may apply.
The required work product is a Real Estate Report, in which the reporting person sets out (i) its own identity, (ii) the property being transferred, (iii) the transferor, (iv) the transferee entity or trust, (v) the individuals representing the transferee entity or trust in the transfer, and (vi) the beneficial owners of the transferee entity or trust. Total consideration must also be reported, along with certain information about the payments made by the transferee. Beneficial ownership information includes name, date of birth, residential address and citizenship, and a unique identifying number issued by a government authority, requiring in many cases a social security number or other tax identification number. Information to be collected about transferors or trustees who are individuals will, in many cases include social security numbers.
The definition of “beneficial owner” of a reporting company is an individual who, as of the date of closing, satisfies the definition of a beneficial owner in FinCEN’s CTA reporting rule. In general, a beneficial owner of a transferee entity is an individual who directly or indirectly, either (i) exercises substantial control over the transferee entity, or (ii) owns or controls at least 25% of the transferee entity’s ownership interests. This definition may be harder to apply to transferee trusts. There is a separate definition for the “beneficial owner” of a reporting trust, which is a five-factor test that also is somewhat consistent with the CTA definition.
The so-called “reporting cascade” determines who must report. The seven categories, in order of priority, are individual(s) who act in the closing in the following capacities:
- The listed closing or settlement agent;
- If none, the preparer of the closing or settlement statement;
- If none, the filer with the recording office of the deed or equivalent instrument;
- If none, the underwriter of the owner’s policy of title insurance;
- If none, the person that disburses the greatest amount of funds for the closing (including escrow agents);
- If none, the person who evaluated the title; and
- If none, the person who prepared the deed or other instrument of transfer.
If none of the foregoing exist, a report need not be filed. This is purported to be similar to the methodology for the current IRS Form 1099-S, delivered in connection with many closings.
There is no exclusion for attorneys in the list above. FinCEN does state that some accommodation may be available to mitigate potential breaches of an attorney’s ethical obligations, but nothing specific is yet proposed.
Alternately, individuals in the above tranches can elect the reporter, as with IRS Form 1099-S, regardless of the cascade tier inhabited by the selected individual. Such election will be set out in a “Designation Agreement” signed by the individuals in question. The designated reporter is instructed to collect information from the transferee or its representative, but this information must be certified to the best of the informant’s knowledge. The designated reporter can reasonably rely on this information, absent contrary indications.
The RRE Rule also includes limited obligations to save copies of certain information received or collected in the compliance process. Penalties for non-compliance of the RRE rule are those created under the BSA and include both fines (which can be substantial) or imprisonment. And, of course, the reputational effect of a breach (or alleged breach) of the Bank Secrecy Act is not insignificant.
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