Starting Tuesday, March 1, certain real-estate buyers in Manhattan and Miami-Dade County will need to reveal their identities as a result of a government rule in place until August 27, 2016. Here is what you need to know about the temporary measure and how it might affect your property purchase:
What does the new rule say?
Title insurance companies must disclose the identity of the persons behind shell companies used in all-cash purchases of homes priced at more than $3 million in Manhattan and $1 million in Florida’s Miami-Dade County. The information will be disclosed to the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
What is a title insurance company?
Title insurance companies sell policies to homebuyers that protect them from forged deeds, outstanding taxes or mortgages against their new property, and falsification of records, among other potential risks. The insurance is a requirement in financed transactions (i.e., those that use a mortgage) but not in all-cash deals. Nevertheless, according to real estate experts, virtually all buyers take out title insurance. “Out of 100 deals, maybe one will buy without title insurance,” said Antonio Martinez, a real estate attorney at Florida Secured Title in Coral Gables
How will it work?
Title insurers must file a form with FinCEN within 30 days of the sale’s closing. This form includes information about the identity of the “purchaser” and the “beneficial owner.” These two individuals must provide a copy of their driver’s license, passport and other identification documentation. If the purchaser is a limited liability company, it must provide a name, address, and tax identification number for all its members. In addition, the insurer will record the property address, the date of the closing of the transaction, the total amount transferred and the total purchase price. The insurer must keep all records for five years from August 27. If the rule is extended, the insurer must keep records for five years from the rule’s new end date.
What is the difference between a “beneficial owner” and a “purchaser”?
FinCEN defines a beneficial owner as the individual who, directly or indirectly, owns 25% or more of the equity interests of the purchaser; the purchaser is the “legal entity” that is purchasing. A legal entity is a corporation, limited liability company, partnership or other business entity formed under U.S. laws or those of a foreign country.
Why is the Treasury Department doing this?
The federal government suspects that some all-cash purchases of high-end properties are being used for money laundering. With this rule in place, “we will know more than what we know now,” said a FinCEN spokesperson. “Even changes in [purchasing] behavior are interesting to observe.” [header]How will the U.S. government use this information?[/header] FinCEN will keep the information in its database and make it available to law enforcement investigators. The information is not expected to appear in public records, so while buyers’ identities will be exposed to the U.S. government, they will remain hidden from the general public. [header]Why Manhattan and Miami-Dade?[/header] FinCEN has not given a reason for choosing these two locations, but experts suspect it is due to the two areas’ mature luxury markets and high foreign buyer activity. Approximately 55% of real estate purchases by international buyers in the U.S. are all-cash, according to data from the National Association of Realtors. [header]How many properties could potentially fall under the new rule?[/header] As of February, more than 2,400 active listings were priced at $1 million or above in Miami-Dade, and there are close to 2,000 active listings of $3 million or more in Manhattan, according to real estate appraisal and consultancy firm Miller Samuel. Manhattan is one of five boroughs that constitute the city of New York. The other four (Brooklyn, Queens, Bronx and Staten Island) are not affected. [header]Will the rule become permanent?[/header] Maybe. The FinCEN spokesperson said the six-month measure is meant to provide the agency with more information about the real estate market and that “it may contribute to a formal rule-making process” in the long term. This would call for a period of public comment. [header]Will it work?[/header] Some experts are skeptical. “I don’t know how successful it will be; there seem to be a bunch of ways to get around it,” said Scott Segal, a real estate attorney based in New York City who has been working with high-end international homebuyers for more than 30 years. According to Segal, the new information required by FinCEN won’t always reflect the true identities of property owners, since buyers could be purchasing with the help—and names—of friends or associates. “A title company can only verify beneficial owners to a certain level of accuracy, given the ability of buyers to use jurisdictions to incorporate […] that would allow straw buyers to pass initial review for a completed closing,” said Martinez of Florida Secured Title. “[The rule] is not comprehensive.” Buyers wishing to avoid the new regulation could forgo title insurance, buy outside the covered areas, purchase cheaper homes or use a straw buyer. View full listing (pictured top)
Write to Andrea López Cruzado at andrea.lopez@dowjones.com