Wealth manager Michael Conticelli writes that agents must understand ownership rights to ensure they are using correct documentation and contracts for legal compliance.

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The fight against money laundering has now become a key concern for many real estate agents. The Corporate Transparency Act (CTA), a federal law passed in 2021, aims to prevent money laundering and other illegal activities by closely monitoring business entities across the United States. This includes corporations, limited liability companies (LLCs), and other entities created by filing documents with a state office.

As a real estate agent or broker, understanding these new requirements is essential to staying compliant, avoiding hefty fines and effectively guiding your clients. Part of mastering your craft as a real estate agent is to understand the ownership relationships of the collateral and clients together, and how that ownership can be transferred legally in a sale. Here’s how to identify relationships in business and investment transactions and the potential pitfalls you need to watch for.

Understanding the new BOI reporting requirements

The world of real estate often involves creating separate entities for business ownership or investment purposes. Brokers and agents frequently set up entities like LLCs to manage their real estate activities. Real estate investors also commonly form LLCs to purchase investment properties.

One key provision of the CTA that took effect in January 2024 is the Beneficial Owner of Interest (BOI) reporting requirement. This mandates that many companies report information to the Financial Crimes Enforcement Network (FinCEN) about the individuals who ultimately own or control them, known as “Beneficial Owners of Interest.”

Many small businesses, including those run by real estate professionals, may be unaware of this new reporting requirement. The deadline to report beneficial ownership information to FinCEN is fast approaching: January 1, 2025, for existing businesses and 90 days from formation for new businesses formed in 2024.

What needs to be reported?

First, determine if you are required to report. While most companies must report, there are exceptions. Then, identify the individuals in your company who are considered Beneficial Owners of Interest or applicants.

For example, if you set up an LLC with a partner to manage rental properties, both of you would be considered beneficial owners. For each beneficial owner, you must provide their name, address, date of birth, and a government-issued photo ID. This information is submitted directly to FinCEN.

It doesn’t stop there

Reporting doesn’t end with the initial submission. Any changes to the reported information must be updated within 30 days. Changes in residence, new driver’s licenses, or name changes due to marriage or divorce require reporting.

It is important to set up a system to monitor BOI changes, which can save you a lot of headaches (and money) down the road. Failure to report can result in severe penalties, including fines of up to $500 per day and criminal penalties of up to two years in jail and fines up to $10,000.

Hold on, there’s a lawsuit!

While these requirements aim to catch bad actors, some argue they are especially burdensome for small businesses. The National Small Business United (NSBU) sued the government, claiming the rules were too onerous. In March 2024, a judge ruled in their favor, but this relief applies only to the roughly 65,000 NSBU members involved in the lawsuit.

What does this mean for you?

For most real estate agents and brokers, BOI reporting is still required. FinCEN has stated, “Other than the particular individuals and entities subject to the court’s injunction, as specified below, reporting companies are still required to comply with the law and file beneficial ownership reports as provided in FinCEN’s regulations.”

The recent court case highlights the evolving legal landscape surrounding the CTA. However, playing it safe and filing your report remains the best course of action. FinCEN has already begun sending warning letters about the mandatory filing deadline to those who formed new business entities early in the year, reminding them of the $500 per day civil penalty and criminal penalties of up to two years in prison and fines up to $10,000.

By understanding the basic BOI requirements, real estate agents and brokers can protect themselves while adding value to their client interactions. However, remember not to provide legal or tax advice — always direct clients to consult qualified professionals for specific guidance.

The world of real estate often involves creating a separate entity for ownership of a real estate business or investments. While ownership interests are examined closely in agent initial education, understanding ownership rights is something that agents should pay close attention to and ask questions about for their clients to ensure they are using correct documentation and contracts for legal compliance.

Michael Conticelli is an experienced wealth manager and investment advisor. Connect with him on Linkedin.

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