A New Law Affects Real Estate Investors: How to Comply and Avoid Liability

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This article is presented by Corporate Direct. Read our editorial guidelines for more information.

A new law has already taken effect, yet nobody is talking about it. And if you own real estate through an LLC or another entity, it already applies to you.

This new law is the Corporate Transparency Act (CTA). But what exactly is the CTA? And what does it require real estate investors to do? Let’s walk through these new requirements.

What Is the Corporate Transparency Act (CTA)?

In 2021, Congress passed the CTA to combat illegal activities such as money laundering and terrorist financing. In fact, one of the stated aims was to stop “criminal actors” from using entities to purchase real estate. And because many states don’t require business owners to report personal information, it’s hard for the government to access it. But now the government wants to know.

The CTA took effect on Jan. 1, 2024. And if you are a real estate investor who holds title to your rental property through an entity, the CTA requires you to report three pieces of beneficial ownership information (BOI) to the Financial Crimes Enforcement Network (FinCEN) of the U.S. Department of the Treasury. Here’s a look at each.

1. Reporting Company Information

A “reporting company” is any company, whether domestic or foreign, formed by filing a document with the Secretary of State (or a similar state office), or an Indian tribe. These reporting companies must report the following information to FinCEN:

• The reporting company’s name, and any trade names or DBAs (if applicable);
• The business street address; 
• The formation jurisdiction; and 
• A “unique business number” (which can be the company’s EIN number from the IRS).

If you own real estate through an LLC or another entity, your entity will most likely be a “reporting company,” unless one of the following reporting company exemptions apply.

Reporting company exemptions

There are 23 types of reporting companies that are exempt from reporting information to FinCEN. Here are three exemptions that real estate investors must know about.

1. Tax-exempt entity exemption: This exemption includes three types of entities. The first is that the entity is an organization described in section 501(c) and exempt from tax under section 501(a). The second is an entity that is a political organization, defined in section 527(e)(1). And lastly, the entity is a trust, described in section 4947(a).

Most notably missing under this exemption is homeowners associations (HOAs), which file tax returns under Section 528 of the tax code. While there has been talk about exempting HOAs, it most likely won’t happen. Because of this, most HOAs will need to comply with the CTA by reporting their BOI to FinCEN.

2. Inactive entity exemption: In order to be exempt as an inactive entity, a business must:

• Be in existence before Jan. 1, 2020;
• Not be engaged in active business;
• Have no ownership held by a foreign person;
• Have had no change in ownership in the last 12-month period;
• Not have sent or received funds over $1,000 within 12-month period; and
• Not hold any type of assets.

For real estate investors, this exemption may apply to syndications that have wound up, or to investors who formed an entity to buy a rental property but didn’t wind up doing it.

If you meet all the requirements listed, your reporting company will not need to report your BOI to FinCEN.

3. “Large operating companies” exemption:  An entity falls into this category if:

1. It employs 21 or more employees in the U.S.;
2. It has more than $5 million in gross receipts or sales in the U.S.; and
3. It has a physical office in the U.S.

If a company meets all three requirements, it does not need to report its BOI to FinCEN. But if someone starts out thinking that they will have at least $5 million or more in gross sales, they will still need to file, since they have no proof of their lofty goals.

2. Beneficial Ownership Information

A “beneficial owner” is someone who owns at least 25% of the company, or someone who exercises “substantial control” over the company.

 The “substantial control” requirement is broad. It can include managers, directors, officers, or anyone else (including lenders, with granted powers) who can make decisions for the company. 

Companies must submit the following pieces of beneficial ownership information to FinCEN:

• The beneficial owner’s name;
• The beneficial owner’s birthdate;
• The beneficial owner’s residential or business street address; and
• A “unique identifying number” from a passport or driver’s license (with an image).

If you are a real estate investor who owns more than 25% of an entity that holds title to a rental property, you automatically qualify as a beneficial owner. And if you exercise any management control over the entity, regardless of your ownership percentage, you will qualify as a beneficial owner under the “substantial control” requirement.

3. Company Applicant Information

A company applicant is someone who is responsible for submitting these reports to FinCEN. Because Corporate Direct will submit these reports on behalf of our clients, we are deemed to be a company applicant. However, FinCEN only requires this information for entities formed after Jan. 1, 2024. 

FinCEN requires the following pieces of company applicant information:

• The company applicant’s name;
• The company applicant’s birthdate;
• A business or residential street address; and
• A driver’s license or passport (with a document number and an image).

If you’re a real estate investor who forms an entity after Jan. 1, 2024, you will need to report this company applicant information to FinCEN. Corporate Direct can report this information for you. 

Beware of companies who will file your articles with the state but won’t file the information with the federal government. They are breaking the law.

When to File

The timing to file these reports depends upon when the reporting company was formed. 

• If your reporting company was formed before Jan. 1, 2024, you have one year (or until Dec. 31, 2024) to report your information to FinCEN.
• If your reporting company was formed between Jan. 1, 2024, and Dec. 31, 2024, you have 90 days to report your information to FinCEN.
• If your reporting company was formed after Jan. 1, 2025, you only have 30 days to report your information to FinCEN.
• When your reporting company has a change in ownership, a new mailing address, or someone discovers an error in a previous report, you only have 30 days to file the corrected reports.

Penalties For Not Filing

Not complying with the CTA can mean serious penalties. If you don’t report this information, you can face up to $10,000 in fines and/or two years in jail.

The Worst Part of the CTA

Very few people are discussing the CTA. However, it already places a burden on most real estate investors across the country. And the worst part is that many registered agent services will not report their client’s BOI to FinCEN. Even some attorneys have told their clients not to worry about the CTA. Because there are severe punishments for not reporting, this opens up their clients to unnecessary liability.

However, Corporate Direct is very concerned about the CTA. In order to avoid the CTA’s fines and penalties, we can prepare your initial and amended reports and submit them to FinCEN. You can schedule a free consultation with us by clicking the link here: https://corporatedirect.com/schedule/.

For more information on the CTA and other real estate topics, please visit CorporateDirect.com or check out Corporate Direct’s YouTube channel.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.