South Florida: Cash Deals for Home Purchases under the Feds’ Microscope

Government Scrutiny of Luxury Real Estate

Back in 2016, the Treasury Department’s Financial Crimes Enforcement Network (“FinCEN”) began cracking down on real estate transactions involving high-end properties purchased through shell companies out of concern about money laundering and illicit transactions. FinCEN subjected these type of transactions to governmental review, and came to require U.S. title insurance companies to identify the natural persons behind the entities used to purchase properties in high-end residential real estate markets, including Miami-Dade County. The focus of the investigation has been, in particular, cash and non-financed transactions.

Now, two years later, the regulations have had an impact. As a recent Miami Herald article explains, and a Housing Wire article clarifies, the Federal Reserve Bank of New York and the University of Miami recently conducted a study which reflects a 95% decrease in home purchases by shell companies and other corporate entities in Miami-Dade County since FinCEN issued its new rules in 2016. Although the numbers have fallen dramatically, the Miami-Dade real estate market is still alive and well.  The study suggests that buyers are just finding other ways to buy without triggering the reporting requirements.

Interestingly, previously, the transactions subject to the government review were in the amount of $1 million or above.  That rule was well-known, and accompanied by news releases and mass publication.  The threshold amount has since been substantially lowered, which was supposed to be confidential, but the Miami Herald chose to report on it anyway.

What does this all mean?

The government’s higher scrutiny for these type of real estate transactions is having an effect, but raises the question, how far can the government go in regulating the real estate industry?

Also, purchases through shell companies do not automatically equal to fraud or money laundering. Wealthy buyers often utilize LLCs, trusts and other corporate entities out of concern for privacy, tax benefits, estate planning, and liability concerns. So, these regulations also target legitimate purchasers having no sinister intent.

Additionally, the higher scrutiny has important implications for real estate attorneys, particularly those who also write title insurance and conduct closings.  The reporting requirements cause a conflict of interest, as real estate attorneys in this dual position have to comply with FinCEN reporting requirements and yet still maintain attorney-client confidentiality. Talk about being between a rock and a hard place.

From the trenches,

Roy Oppenheim