Real estate investors are often advised to hold their real estate investments in a limited liability company (an "LLC") for the liability protection that an LLC provides. Further, foreign non-U.S. investors in U.S. real estate may have received and followed advice from counsel to hold their U.S. investment properties in a holding company in the form of an LLC, corporation, partnership, trust or a foreign entity in order to avail themselves of beneficial U.S. income and estate tax treatment. While owning the investment property in one or more entities may provide certain tax benefits and legal protections, depending on the specific ownership structure and circumstances, investors may now be subject to new reporting obligations in connection with their entities.

Starting on January 1, 2024 (the "Effective Date"), the U.S. Department of Treasury, through the enactment of the Corporate Transparency Act (the "CTA"), requires certain entity owners to submit reports containing "beneficial ownership information" ("BOI") of the entity to the Financial Crimes Enforcement Network ("FinCEN"). The applicability of the CTA, the timing requirements, and the requested BOI will vary from entity to entity. Foreign investors especially, should seek the advice of competent counsel to review their current ownership structures for any new upcoming reporting requirements in connection with their entities.

What is the Corporate Transparency Act?

Enacted on January 1, 2021, as part of the Anti-Money Laundering Act of 2020, the CTA aims to combat abuse of anonymous companies, money laundering, the financing of terrorism, and other illicit activity. It is designed to capture more information about the beneficial ownership of specific entities operating in or accessing the U.S. market. The CTA requires both new and existing companies to disclose certain information about their true, primary owners to FinCEN. By obtaining information from every applicable entity, the government hopes to filter out shell companies that continue to carry out criminal activities.

Who Must Report?

The CTA regulations outline two categories of entities that must report. The first category, the domestic reporting company, consists of any entity that is a corporation, limited liability company, or created by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. The second category, the foreign reporting company, includes any entity that is a corporation, limited liability company, or other entity formed under the law of a foreign country and registered to do business in any state or tribal jurisdiction by the filing of a document with a secretary of state or any similar office under the law of a state or Indian tribe. State for this purpose includes, "any state of the United States, the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of Northern Marina Islands, American Samoa, Guam, the United States Virgin Islands, and any other commonwealth, territory, or possession of the United States".

While there are a handful of entities that are exempt from reporting to FinCEN (i.e., banks, governmental authorities, financial advisors), most entities owned by a foreign individual looking to invest in U.S. real estate will be required to comply. Foreign investors should consult legal counsel to determine which category their existing entities falls under, if any, to take the next steps.

In summary, if any documents have been filed with the secretary of state or any similar office under the law of a state or Indian tribe, then it is likely that the entity will be subject to reporting requirements.

What Information Must be Reported?

The CTA requires the following information regarding each of its beneficial owners and company applicant(s): the full legal name; the date of birth; the complete current address; a unique identifying number and the issuing jurisdiction of such document; and an image of the acceptable identification documents from which the unique identifying number was obtained. The CTA defines a "beneficial owner" as any individual who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise (1) exercises substantial control over the entity or (2) owns or controls not less than 25 percent of the ownership interests of the entity. Substantial control is defined extremely broadly, and the analysis becomes complicated if the reporting company is owned through a complex structure. The "company applicants" include (1) the individual who directly files the document that creates the domestic reporting company; (2) in the case of a foreign reporting company, the individual who directly files the document that first registers the entity to do business in the United States; and (3) the individual who is primarily responsible for directing or controlling the filing of the relevant document by another. Lastly, all company applicants must be individuals and no company applicant can be an entity.

Based on the timing of a reporting company's formation, or in the case of a foreign reporting company, the timing of the first registration to do business in the United States, the reporting company may be exempt from providing company applicant information. Domestic reporting companies do not have to report company applicant information if the entity was formed before the Effective Date. Similarly, foreign reporting companies do not have to report company applicant information if the entity first registered to do business in the United States before the Effective Date.

Although not specified by the CTA, the final regulations require reporting companies to include certain information about themselves to identify the reporting company in a BOI report.

Key Dates and Timelines of the CTA

Generally, there are two filing periods to note. First, any domestic reporting company formed on or after the Effective Date must file a report containing the required information within 30 calendar days of its formation date. Similarly, any entity that becomes a foreign reporting company on or after the Effective Date must file within 30 calendar days of the date it first becomes a foreign reporting company. Currently an extension is in place allowing reporting companies that are formed between January 1, 2024 and January 1, 2025, to file within 90 calendar days, instead of 30. Second, any domestic reporting company created before the Effective Date and any entity that became a foreign reporting company before the Effective Date must file within one year after the Effective Date. If foreign investors are intending to purchase U.S. investment property with an existing entity, corporate governance documentation should be properly reviewed to prevent any reporting delinquencies.

Additional Regional and State Specific Reporting Requirements

Geographic Targeting Orders:

In addition to the CTA, FinCEN has also issued Geographic Targeting Orders (the "GTOs") requiring U.S. title insurance companies to identify the natural persons behind shell companies used in non-financed purchases of residential real estate. These orders were issued under the authority of the Director of FinCEN pursuant to the Bank Secrecy Act to further assist in tracking illicit funds and other criminal or illicit activity. The terms of the GTOs are effective beginning October 22, 2023, and are slated to end on April 18, 2024, unless extended—and they are expected to be extended.

The GTOs target specific transactions ("Covered Transactions") that involve: the purchase of residential real property by a legal entity; the purchase amount threshold remains $300,000 for each covered location, with the exception of the City and County of Baltimore, where the purchase threshold is $50,000; such purchase is made without a bank loan or other similar form of external financing by a financial institution; and such purchase is made, at least in part, using currency or a cashier's check, a certified check, a traveler's check, a personal check, a business check, a money order in any form, a funds transfer, or virtual currency. The current GTO covers Covered Transactions in the following states: Texas, Florida, New York, California, Hawaii, Nevada, Washington, Massachusetts, Illinois, Maryland, Virginia, Connecticut, Colorado, and Washington D.C. However, only certain counties and boroughs located in the states listed above are covered under the GTO.

If a U.S. title insurance company, or any of its subsidiaries and agents, is involved in a Covered Transaction, it must report the Covered Transaction to FinCEN by filing a FinCEN Currency Transaction Report (the "CTR") within 30 days of the closing of the Covered Transaction. The CTR filed pursuant to the GTOs must contain the following information: the identity of the individual primarily responsible for representing the legal entity; a copy of the individual's driver's license, passport, or other similar identifying documentation; a description of such documentation; the identity of the legal entity; information about the identity of the beneficial owner(s) of the legal entity; a copy of the beneficial owner's driver's license, passport, or other similar identifying documentation; a description of such documentation. The CTR must also provide information relating to the transaction, such as: date of closing of the Covered Transaction; total purchase price of the Covered Transaction and the method of payment; and address of real property involved in the Covered Transaction. When reporting a purchase of multiple properties in the same Covered Transaction, total purchase price and price per property must be disclosed separately.

The GTOs define "beneficial owner" as each individual who, directly or indirectly, owns 25% or more of the equity interests of the legal entity purchasing real property in the Covered Transaction. Additionally, "legal entity" is defined as a corporation, limited liability company, partnership or other similar business entity, whether formed under the laws of a state, or of the United States, or a foreign jurisdiction, other than a business whose common stock or analogous equity interests are listed on a securities exchange regulated by the Securities Exchange Commission ("SEC") or a self-regulatory organization registered with the SEC, or an entity solely owned by such a business.

U.S. title insurance companies, and any of its officers, directors, employees, and agents, may be liable, without limitation, for civil or criminal penalties for violating any of the terms of the GTOs.

New York LLC Transparency Act:

The New York State Assembly passed the LLC Transparency Act (the "LLC Act") on June 20, 2023, and New York Governor, Kathy Hochul, signed it into law December 23, 2024. The LLC Act will become effective one year from December 23, 2024. Because the LLC Act would require reporting companies to report the same information required by the CTA, the LLC Act permits companies to file a copy of the report that they file with FinCEN under the CTA to satisfy their NY obligations. This reporting requirement only applies to limited liability companies organized in New York and foreign limited liability companies (i.e., those organized outside of NY) that are registered to do business in New York. Unlike the FinCEN database, the name of the beneficial owner and the business address of the limited liability company would have been publicly disclosed (in a searchable database), however, through a final compromise, such provisions were ultimately excluded from the final law, meaning the LLC Act will also be a private (non-public) database deemed confidential, except for the purposes of law enforcement, or as otherwise required to be disclosed pursuant to a court order.

As it currently stands, the LLC Act is not yet effective, but when it becomes effective, the compliance component will be a simple "copy-and-paste" process mirroring the CTA, and the penalties are insignificant compared to the CTA. As such, the LLC Act is not likely to pose a problem for most clients.

California LLC Law:

California is also considering new legislation relating to reporting beneficial ownership: Senate Bill 738 ("SB-738") and Senate Bill 594 ("SB-594"), both of which are in the early stages of the legislative process. SB-738 would require foreign corporations and foreign LLCs to additionally disclose certain information (i.e., full name, residential or business address and email address) of each of their beneficial owners on their qualification filing with the California Secretary of State (the "CA SOS"). SB-738 defines beneficial owner as a "natural person who owns, directly or indirectly, 50 percent or more of the entity interest." SB-594 would require domestic and foreign corporations and domestic and foreign LLCs to include the name and business or mailing address of any beneficial owner on their Statement of Information filings with the CA SOS. SB-594 defines "beneficial owner" as a natural person for whom, directly or indirectly and through any contract arrangement, understanding, relationship, or otherwise, either exercises substantial control, as defined in a specified federal regulation, over the entity, or owns 25 percent or more of the equity interest of an entity. An entity's disclosed beneficial ownership information would be publicly accessible through the CA SOS.

Additional Questions to Consider

  1. What happens to the reported information: The U.S. Department of Treasury's intent, through FinCEN, is to establish and maintain a central and non-public database of BOI that may be accessed by law enforcement or certain financial institutions for customer due diligence (CDD) purposes, among other. Similarly, NY DOS intends to maintain a private database. CA SOS intends to make beneficial ownership information fully accessible to the public.
  2. What if my entity fails to comply: The CTA final regulations clarify that any individual, primarily senior officers, in addition to the reporting company, may be liable and subject to civil and criminal penalties. Potential penalty amounts include both civil penalties ($500 per day in civil monetary penalties) and criminal penalties ($10,000 fine, imprisonment of no more than 2 years), or both.

Example Scenarios

Example 1

In 2023, Ivan, a foreign non-U.S. citizen investor residing outside of the United States, decided he wanted to invest in an apartment building located in Miami, Florida (the "FL Investment Property"). Pursuant to the advice of his U.S. tax counsel, to minimize the application of a potential U.S. estate tax by holding the FL Investment Property directly in his own name, Ivan decided to purchase the FL Investment Property in a newly formed Florida LLC (the "FL LLC") wholly-owned by his wholly-owned personal investment company, a company created under the laws of a country other than the United States (the "Foreign Hold Co"). Foreign Hold Co is not registered to do business in any State or Territory of the United States. Ivan fored the FL LLC through Foreign HoldCo on June 1, 2023, and named himself as Manager of the LLC. The LLC purchased the FL Investment Property on July 1, 2023.

  1. Who must report: FL LLC falls under the definition of a "reporting company" and must report its beneficial owners, but not company applicants because it was formed before January 1, 2024. Foreign Hold Co is not registered to do business in any State or Territory of the U.S. and does not need to be reported.
  2. What must be reported: Ivan's personal information must be reported because Ivan is deemed to own FL LLC through Foreign Hold Co. (as an officer, he also qualifies for reporting as someone with substantial control). The following information must be reported: Ivan's full legal name; his date of birth; his complete current address; a unique identifying number and the issuing jurisdiction of such document (driver license or unexpired passport); and an image of the acceptable identification documents from which the unique identifying number was obtained (collectively, "BOI Report").
  3. When must they report: Ivan must file the BOI Report within 1 year of January 1, 2024, because FL LLC was formed before January 1, 2024.
  4. Consequences for non-compliance: Ivan, individually, and FL LLC maybe liable for noncompliance.

Example 2

In late 2023, Ivan was invited by his business partner, Peter, to invest in an apartment building located in New York City, New York (the "NY Investment Property"). Following the advice of Peter's real estate lawyer (the "NY Attorney"), Ivan and Peter instruct the NY Attorney to form an LLC in New York State on their behalf (the "NY LLC"). The NY Attorney instructs the firm's paralegal and forms the NY LLC, with Ivan and Peter, individually, as 50/50 owners, on January 1, 2024. Peter is named as the Manager of the LLC. On February 1, 2024, the NY LLC purchases the NY Investment Property.

  1. Who must report: NY LLC falls under the definition of a "reporting company" and must report its beneficial owners (including those with substantial control) and company applicant because it was formed on January 1, 2024. In addition to reporting to FinCEN, NY LLC will have the same reporting obligations to the New York Department of State (the "NY DOS") under the LLC Act.
  2. What must be reported: Ivan and Peter each must submit BOI Reports because they each own a 50% interest in NY LLC. Each of the NY attorney and the firm paralegal must submit BOI Reports as company applicants because the paralegal performed the direct filing and the NY attorney was the primary responsible party for the filing.
  3. When must they report: Ivan, Peter, the NY attorney, and the firm paralegal must file their BOI Reports with FinCEN within 30 calendar days of January 1, 2024, because NY LLC was formed on January 1, 2024. However, under a new extension, they will now have 90 calendar days. The New York DOS filing would be likely by January 1, 2025.
  4. Consequences for non-compliance: Peter, as manager, Peter and Ivan as owners, and NY LLC may all be liable for non-compliance.

Conclusion

The U.S. federal government and state-level legislatures have implemented, and are expected to implement, substantial reporting and disclosure requirements for both U.S. and foreign entities involved with the U.S. markets. Because these reporting requirements present a new set of obstacles, foreign non-U.S. investors should take time to consider several decision points before purchasing U.S. real property. First, if privacy and anonymity is of concern, an investor should determine which entity, or none at all, is the best approach to owning the prospective real property. If an entity ownership structure is already in place, investors should work with competent counsel to determine which timing rules and exemptions apply, in any, and determine if the reporting requirements apply to the structure. And as with all U.S. investments, especially U.S. real estate, it is especially important to work with competent counsel to maximize income and estate tax efficiencies (ideally before executing the transaction as it isn't always easy to later restructure).Lastly, with respect to the GTOs and state-specific disclosure requirements, investors should consider whether a particular geographical location is worth investing in with the current or anticipated disclosure requirements in place. Failure to comply with these new rules will result in monetary fines and even imprisonment. As such, it is important to seek the guidance and advice of competent counsel before investing in U.S. real property.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.