Corporate Transparency Act (CTA) Compliance in Real Estate

Corporate Transparency Act (CTA) Compliance in Real Estate: What Investors Need to Know for 2024

As real estate continues to be one of the most lucrative and complex industries, regulatory changes can have far-reaching effects on how investors structure their assets and protect their wealth. One of the significant legal shifts impacting the sector is the Corporate Transparency Act (CTA), which came into effect on January 1, 2021. The CTA introduces strict disclosure requirements for many companies, including those in real estate, to increase transparency about beneficial ownership and combat money laundering.

For property investors, syndicators, and real estate developers who often use complex ownership structures like LLCs (Limited Liability Companies), partnerships, or trusts, the CTA has introduced new compliance obligations that must be taken seriously to avoid penalties. In this article, we will break down the CTA, how it affects the real estate industry, and what steps you need to take to stay compliant in 2024 and beyond.

What is the Corporate Transparency Act?

The Corporate Transparency Act (CTA) is a federal law enacted as part of the National Defense Authorization Act in 2020. Its primary goal is to combat illegal activities like money laundering, tax evasion, and terrorist financing by requiring entities to disclose their beneficial owners—the individuals who ultimately control or benefit from a company. The Financial Crimes Enforcement Network (FinCEN), a branch of the U.S. Treasury Department, is tasked with collecting this information and maintaining it in a secure database.

Before the CTA, many companies in the U.S., including real estate holding entities, could operate with relative anonymity, making it difficult for authorities to trace ownership in cases of suspected criminal activity. The CTA mandates that companies provide FinCEN with specific information about their beneficial owners, making corporate structures more transparent.

How Does the CTA Affect Real Estate Investors?

Many real estate investors structure their holdings through LLCs, corporations, or other entities to manage risk, access financing, or pool resources through syndications. The CTA now requires that these entities provide detailed information about who the true owners are. This includes individuals who own at least 25% of the entity or exercise significant control over it.

Who Needs to Report?

Under the CTA, most entities in the real estate sector must report their beneficial owners, including:

• LLCs commonly used for owning and managing rental properties.
• Partnerships formed to pool investor capital for larger projects.
• Corporations set up to develop, buy, or hold real estate.

However, some entities are exempt from reporting, such as larger, publicly traded companies and certain regulated entities like banks.

What Information Must Be Reported?

Entities subject to the CTA must disclose the following information about their beneficial owners:

1. Full legal name
2. Date of birth
3. Current residential or business address
4. Unique identifying number from an acceptable document, such as a passport or driver’s license.

Why This Matters for Real Estate Investors

For real estate investors, the CTA adds an additional layer of regulatory compliance, particularly if you use LLCs or partnerships to hold property. Many syndications, where a group of investors pool money to buy large properties, will be directly affected. Syndicators will need to report not only their information but also the information of individual investors who meet the beneficial ownership threshold.

Key Challenges of CTA Compliance for Real Estate

Complex Ownership Structures

Real estate investment often involves complex, multi-tiered ownership structures where multiple LLCs or partnerships own shares in a property. Tracing beneficial ownership through these layers can be time-consuming and challenging. Syndications, for example, might involve hundreds of investors, requiring syndicators to carefully determine who meets the 25% ownership or control threshold.

Increased Administrative Burden

For real estate developers and property owners who manage multiple entities, the CTA introduces additional paperwork and administrative oversight. Each entity must comply with reporting requirements or face substantial penalties, which can be as high as $500 per day of non-compliance, with potential criminal charges for willful violations.

Privacy Concerns

Real estate investors value privacy, and one of the reasons LLCs have been so popular in the industry is the anonymity they provide. While FinCEN promises that the beneficial ownership database will not be publicly accessible, there are concerns about the potential for data breaches or misuse of this sensitive information.

What Happens if You Don’t Comply with the CTA?

Failure to comply with the CTA can lead to severe penalties, both civil and criminal. Companies that fail to report, provide incomplete information, or intentionally provide false information face fines up to $10,000 and imprisonment for up to two years. Real estate investors who rely on LLCs and other entities for property ownership should take these penalties seriously, as non-compliance can jeopardize not only their investments but their personal freedom as well.

What Real Estate Investors Should Do to Ensure Compliance

1. Identify Your Beneficial Owners

Real estate investors need to start by identifying all beneficial owners of their entities. For LLCs or partnerships, this means tracing through ownership layers to determine who meets the 25% ownership threshold or who has significant control over the entity’s activities. This can be a particularly complex process for syndications or multi-tiered investment structures.

2. Gather Required Information

Once you’ve identified your beneficial owners, the next step is gathering the required personal information (name, address, date of birth, and identification numbers) to be reported to FinCEN. This may involve contacting investors or partners to obtain the necessary documentation.

3. File Reports with FinCEN

Reports must be filed with FinCEN according to the CTA’s timeline. For newly formed entities, reports must be filed within 30 days of incorporation. For existing entities, reports are expected to be submitted by January 1, 2025. Any changes in beneficial ownership must also be reported within 30 days of the change.

4. Keep Records Updated

It’s essential to keep your entity’s records updated with the latest information about beneficial ownership. Any changes, such as the sale of an ownership stake or changes in management, must be reported to FinCEN promptly. Establishing a system for tracking ownership changes will help ensure ongoing compliance.

5. Consult Legal and Tax Advisors

Given the complexities of the CTA and the potential penalties for non-compliance, it’s wise to work with legal and tax professionals who understand both the act and the real estate industry. These professionals can help navigate the complexities of ownership structures and ensure that your filings are accurate and complete.

The Corporate Transparency Act represents a major shift in how real estate investors must report and disclose their beneficial ownership information. For those who use LLCs, partnerships, or other entities to hold property, compliance with the CTA is now a critical component of doing business. With heavy penalties for non-compliance, it’s essential that real estate investors take the time to understand their obligations under the law, identify their beneficial owners, and report this information to FinCEN in a timely manner.

By staying informed and proactive, investors can ensure that their real estate entities remain in good standing while avoiding fines or legal trouble. As we move into 2024, the real estate industry must adapt to this new level of transparency, balancing privacy concerns with the need to comply with the law.