The Corporate Transparency Act (CTA) is a new law that will go into effect in 2024 and could have major implications for home buyers and real estate investors who use business entities to purchase properties. Owners of non-exempt corporations and LLCs will now be required to report identifying information of any parties with significant control of the company to the federal government. Here is a closer look at the Corporate Transparency Act of 2024 and what you need to know.
What is the Corporate Transparency Act?
The Corporate Transparency Act is a bipartisan bill enacted by Congress to crack down on money laundering and other financial crimes. It was enacted in 2021 but goes into effect on January 1st, 2024, and requires all reporting companies to provide the identifying information of any beneficial owners to the US Department of Treasury's Financial Crimes Enforcement Network (FinCEN). The CTA is part of a larger initiative to prevent criminals from using business entities to move money and purchase assets anonymously. However, it applies to anyone with significant control or ownership of an LLC, corporation, or other entity.
What's Required Under the Corporate Transparency Act?
Any reporting companies formed before Jan 1, 2024, will be required to submit the necessary identifying information to FinCEN by Jan 1, 2025. Entities formed on or after Jan 1, 2024, and before Jan 1, 2025, have 90 days to report, and any future entities formed after that date will have 30 days.
FinCEN requires the following information on all beneficial owners of the entity:
- Full legal name
- Complete current address
- Date of birth
- Identification number from an acceptable form of ID (driver's license, passport, etc.)
You can find more resources on the Corporate Transparency Act and how to file by visiting FinCEN's website. The Corporate Transparency Act form will be available to file electronically on Jan 1, 2024.
What is a Reporting Company?
A reporting company refers to any corporation, limited liability company (LLC), or other entity that was formed by submitting paperwork to the Secretary of State or Indian Tribe. Foreign companies registered to do business in any US State are also required to report.
Who is a Beneficial Owner?
A person is considered a beneficial owner if they:
- directly or indirectly exercise substantial control over the business
- own or control no less than 25% ownership interest in the company
So, even if you are not actively involved in the day-to-day operations of the business, you must still report your information if you have a significant profit interest in the company. If you are the beneficial owner of multiple entities, FinCEN will want that information from each business.
Are There Any Exemptions?
Yes, twenty-three different types of entities are exempt from reporting to FinCEN by the Corporate Transparency Act. These generally apply to large, publicly traded companies that are already required to report this type of information. However, any entity that satisfies the following conditions is exempt from reporting under the CTA:
- The business has more than 20 full-time employees
- The entity reports more than $5 million in annual revenue to the IRS
- The company has a physical office in the United States
Subsidiaries owned by exempt businesses are also not required to report.
The Impact of the CTA on Real Estate
The CTA will undoubtedly change the real estate market in many ways, some for the better and others for the worse. The added regulatory pressures may burden companies that utilize complex legal structures to operate their business, which could slow down the rate of new development and stifle investment. However, it's intended to crack down on money laundering and other illicit activity and will impact criminals the most. So, in the long run, legitimate businesses will benefit from increased confidence in the market. But it will affect everyone differently.
How Will the Corporate Transparency Act Affect Homeowners?
The CTA will only affect homeowners if they use a business entity such as an LLC to purchase the property or plan to use one in the future. So, the average homeowner will not be impacted, but real estate investors and high net-worth individuals who use LLCs for privacy reasons will be required to report. So, the Corporate Transparency Act may have even larger implications in New York City than in other parts of the country.
In Manhattan, it's common for millionaires and billionaires to purchase luxury properties using anonymous business entities - also known as shell companies. About 37% of Manhattan real estate is owned by an LLC, which is 5x higher than the rest of New York State. The reason has to do with the high values of Manhattan real estate.
While rarely some of these high-net-worth individuals purchasing real estate using shell companies may have bad intentions, others have legitimate privacy concerns. If the sale makes their information public, they may become a target for scammers, hackers, and ambulance chasers who want their assets. So many millionaires and billionaires who are vulnerable to this threat may prefer to stay anonymous.
Luckily, the CTA will not jeopardize anyone's privacy. Any information provided to FinCEN under the Corporate Transparency Act will remain anonymous and not be in the public record. So, if you have nothing to hide, you don't have anything to worry about. If you happen to own a large portfolio of properties, it may be a headache to fill out all the forms, but it won't have any negative consequences in the long term if you obey the law.
How Will the CTA Impact Foreign Investors?
Foreign investors commonly use shell companies to purchase property in the United States, especially in New York City. So, there are some who fear that the increased regulations imposed by the CTA will deter potential investors, reducing the flow of capital into the housing market. The law applies to US businesses and any company registered to do business in the United States, including shell companies set up to purchase hard assets like real estate.
While the new regulations will potentially make some foreign investors reconsider purchasing property in the United States, it likely won't have a significant impact other than deterring financial criminals. As long as the real estate market is strong and there's an opportunity to make a profit, foreign investors will continue buying, even if they must fill out additional paperwork. Many experts also argue that the increased transparency will prevent bad actors from investing in the US, which will bolster the market in the long run.
How Will the CTA Change the Broader Real Estate Market?
Although the CTA will increase transparency in the housing market and make it easier for authorities to identify financial criminals, the increase in regulations will inevitably impact the broader real estate industry.
It's standard for real estate developers and investors to set up sophisticated legal structures, also known as special purpose entities (SPEs), to purchase, develop, lease, and finance developments. It's also common for ownership percentages and roles in the company to shift throughout the project's life cycle as key partners take on more debt or exit the deal.
So, reporting all this information to FinCEN accurately within the required time frame to stay in compliance may present significant challenges to the industry. Developers will be forced to adapt over time, but there may be an adjustment period where they're figuring things out that could slow the market. That may also trickle down to the average home buyer, who may have to wait longer for a new development to be completed or may see a stagnation in new construction while the industry adapts to this change.
Real Estate and the Corporate Transparency Act: Bottom Line
The Corporate Transparency Act is designed to strengthen US businesses, including the real estate sector, by cracking down on money launderers and financial criminals. Although it's sure to temporarily impact the housing market, it's unlikely to negatively affect the industry as a whole in the long term. So, law-abiding citizens shouldn't have much to worry about.
We suggest that you reach out to a licensed professional, such as a real estate or trust and estates attorney, if you want to form an LLC to purchase a hard asset like real estate. If you don't know where to begin, reach out to our team, and we'll gladly introduce you to a few. To get started, email us at sales@undividedre.com.
