On real estate

Be advised of new transaction reporting requirements meant to assist law enforcement and regulatory agencies in identifying potential money-laundering operations.

In July 2016, the Financial Crimes Enforcement Network (FinCEN), an agency of the US Treasury Department, issued a Geographic Targeting Order directing title insurers and escrow companies to collect and report information about certain residential real estate transactions in five California counties, including Los Angeles County, when the purchase price was $2 million or more.

Last month that order was expanded in scope and coverage and now may include residential transactions in a wider geographic area for sale prices as low as $300,000.

All the relevant criteria for the new FinCEN order have not yet been made public. As of now, all we know is that any residential transaction where the purchaser is a corporation, LLC, partnership or other legal or business entity buying property without a bank loan will require the title insurance company to file a report to FinCEN.

Title companies must have the buyer complete a four-page information collection form to identify the individuals behind the legal entity before issuing title insurance and allowing the transaction to close.

Areal estate transaction achieves much more than the transfer of property from seller to buyer. It also allows local, county and federal authorities to reassess property taxes, collect fees, unpaid liens or judgments, and future capital gains taxes from the principals in the sale.

The Foreign Investment in Real Property TaxAct (FIRPTA) was passed in 1980 to impose income tax on foreign persons disposing of real property in the USA.

Under the law, buyers are legally obligated to instruct the escrow holder to withhold 10% of the gross sales price of a property sold for $1 million or less (15% if over $1 million) if the seller is a “foreign person” without a Social Security or tax ID number.

Buyers must verify that escrow has obtained the necessary information to exempt the sale from the federal withholding requirement or could be held liable for the amount due.

The State of California requires escrow to withhold and send to the state upon closing 3 1/3% of the gross sales price from a seller who is selling investment property. 1031 tax exchanges are exempt from the CA593 withholding, and a seller may appeal by filing a letter from their CPAshowing no or minimal gain on the property.

Adriana Donofrio Podley Properties Glendora (626) 926-9700 adrianad@podley.com