No More Anonymous Real Estate Purchases from Shell Companies in the U.S.

Purchasers paying cash for high-end homes in select U.S. cities will no longer be able to do so anonymously — at least until February. A new slate of rules, handed down from the Treasury Department, went into effect back in January. At that time, the rules were part of a pilot program and only applied to Manhattan and Miami. On August 28, however, the program will roll out to all of New York City, as well as multiple other counties in California, Florida, and Texas.

The purpose of the program is simple: to prevent individuals from hiding assets or illegal funds by using shell corporations to anonymously purchase luxury real estate. With this move, the Treasury Department is attempting to halt the flow of illicit money into the real estate market, which has long been a beneficiary of those attempting to launder questionable funds.

Federal officials took notice of the issue last year when the New York Times reported that, in at least one elite building in New York City, four out of every five apartments were owned by shell companies. At that point, the Treasury established the initial program. At first it focused only on Manhattan and Miami, but the program’s success (and the continuing problems in other areas) led the Department to expand it.

The new iteration of the plan is scheduled to begin on August 28. It will run for at least 180 days, after which time it will automatically expire if not renewed by the Treasury. The mechanism of the plan is simple: title insurance companies are effectively bearing the burden of reporting, as they are now required to identify cash purchasers over certain thresholds to the Treasury. These thresholds vary by locale and range from $1 million to $3 million.

The expanded program could affect billions of dollars worth of transactions. A recent report on national home-buying data found that approximately 50% of  all residential  transactions totaling more than $5 million involve shell companies. Under the new plan, anyone with more than a 25% stake in the holding company must be identified by the title insurance company; their name will be placed into a database that the Treasury will share with law enforcement agencies.

Critics say the plan’s loopholes — such as one that creates an exception for transactions funded by wire transfer — mean the plan is fundamentally flawed and can’t possibly accomplish the goals for which it was specifically designed. They may be right; multiple real estate agents in targeted locales report they have not seen a significant drop in transaction volume and argue that it’s impossible to say whether any effects are due to the new rules or simply to decreased market demand due to economic conditions.

Chris Burch is a venture capitalist and founder of Burch Creative Capital.

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