Is the IRS Tracking Real Estate Investors?

When the Corporate Transparency Act goes into effect, the federal government will have a route to tracking information on real estate investors who set up certain business entities, including limited liability companies and limited partnerships. Understanding the new law and how to comply is imperative to avoid fines and other penalties if you’re one of these investors

This comprehensive guide to the CTA for real estate investors can help with information, including who it affects, what you need to report, and tips you can use to comply with the law.

Key Takeaways

• The CTA is a new federal law requiring businesses to submit information about their beneficial owners to the federal government.
• If you operate an LLC, limited partnership, or similar entity for your real estate business, you must comply with this law.
• The law will require you to submit information, such as your address and government-issued identification.
• The government will impose civil and criminal penalties on those who fail to comply with the CTA.
• As a real estate investor, you can work with Infinity Investing to understand your obligations under the CTA so you know how to comply.

What Is the CTA?

Passed in 2021, the CTA is a federal law requiring business entities, known as reporting companies, to file information about their beneficial owners. It aims to prevent financial crimes, including money laundering and tax evasion, by targeting anonymous entities and shell companies. Under the law, any individual who owns or controls over 25% of an entity must report their personal information to the federal government, including their name, address, and government-issued identification number.

How Does the CTA Affect Real Estate Investors?

The law, which takes effect on Jan. 1, 2024, will have a widespread impact on small business owners in the United States, including real estate investors doing business as an LLC or a similar entity. It will burden investors who set up business entities to own and operate real estate.

Under the law, you must report beneficial ownership information if you own or have substantial control over a reporting company. A reporting company includes domestic and foreign companies registering to do business in the United States by filing a document with a state or tribal authority. Typically, reporting companies include:

• LLCs.
• Limited liability partnerships.
• Business trusts.
• Limited partnerships created by filing a document with the secretary of state.

While there are some exceptions for reporting companies, most won’t apply to entities that own real estate. In most cases, private real estate businesses will fall under the reporting company definition.

Who Should Report Under the CTA?

Now that you know which entities need to report, knowing who needs to report under the CTA is important. The law refers to beneficial owners as individuals who meet one of these two criteria:

• Exercises substantial control over a reporting company.
• Owns or controls at least 25% of a reporting company’s ownership interests.

Let’s look at each of these to determine whether you need to report under the CTA.

Substantial Control

You must comply with the CTA if you exercise substantial control over a real estate business, even if you’re not an owner. According to the law, a person with substantial control can fall into any of these categories:

• A senior officer, such as the president or chief financial officer.
• Someone with the authority to appoint or remove company officers or board members.
• Anyone who makes important business decisions, including asset sales or budget approval.
• Someone with another form of substantial company control, such as in a flexible corporate structure.

The CTA includes these individuals to close potential loopholes in the law. For example, if you own 80% of the business and your husband or wife owns 20%, you don’t need to disclose your partner’s information. However, if your spouse manages the business or has decision-making abilities, you must report their information under the law.

Ownership Interests

Like substantial control, the definition of ownership interests is very broad under the CTA. According to the law, ownership interests include:

• Equity, stock, or voting rights.
• Capital or profit interest.
• Convertible instruments.
• Options or other non-binding privileges.
• Any other instrument, contract, or mechanism to establish ownership.

If you own or control over 25% of ownership interests, you must file as a beneficial owner under the CTA.

What Information Should You Report?

If you meet either definition of a beneficial owner, the law requires you to report certain information to the Financial Crimes Enforcement Network, an agency of the U.S. Department of the Treasury. In addition to information about the entity, you must send the government details about yourself and all other beneficial owners. Here’s a checklist you can use to make sure you submit the correct information.

Reporting Company Information

• Full legal name of the entity.
• Any trade name or “doing business as” name.
• Current U.S. address for the entity’s primary place of business.
• State or tribal jurisdiction of formation.
• Taxpayer identification number, including an employer identification number.

Beneficial Owner Information

• Full legal name.
• Date of birth.
• Full current address.
• Unique identifying number from a government-issued identification document, such as a U.S. passport or state driver’s license.
• Image of the identification document.

Who Has Access to This Information?

You’ll file your beneficial ownership information to FinCEN to hold in a database. Under the law, FinCEN can provide this information to federal, state, and local officials who submit a request through a federal agency. Officials must provide a reason for needing this information relative to national security, intelligence, or law enforcement. Financial institutions may also access beneficial ownership information with the reporting company’s consent.

Penalties for Failure To Report

The CTA will go into effect on Jan. 1, 2024. At that time, existing businesses will have one year to submit their information to FinCEN. New entities formed after Jan. 1, 2024, will have 30 days to submit this information.

In addition, you must file updated reports whenever a change to your entity’s beneficial ownership occurs. For example, if you change your address, you must submit an updated BOI filing within 30 days.

The penalties for failing to report under the CTA will be significant, so it’s essential to understand what information to provide and when. Under the law, failure to comply can result in civil penalties, including fines of up to $500 per day. Criminal penalties can also include a fine of up to $10,000 and up to two years in prison.

Tips for Complying With the CTA

While the CTA may have good intentions, it will inevitably create a burden on real estate investors and other small business owners. Here are some tips for complying with the CTA to avoid the potential penalties.

Identify Reporting Companies and Beneficial Owners

Start by preparing a list of all entities holding your real estate assets. If you’re not sure whether an entity qualifies as a reporting company, you can use our helpful quiz to find an answer. Then, determine all the beneficial owners of those entities.

Create a Database

Creating a CTA database to record and track information about your entity’s beneficial owners will be helpful. Start gathering the necessary information for each beneficial owner and input these details into the database. We highly recommend preparing a cyber security plan to fully protect this information.

Update Operating Agreements

While not mandatory, updating your operating agreement to include provisions for compliance with the CTA is a good idea. These provisions may include requirements for beneficial owners to supply the necessary information, including updates. You may also include indemnities to protect the entity if another beneficial owner fails to comply with the CTA.

Get Ready for the CTA With Infinity Investing

The CTA is a complex law with many moving parts. As a real estate investor, ensure that you understand the law’s requirements to fully comply and avoid civil or criminal penalties.

At Infinity Investing, we understand you may feel that this law is a government overreach and a burden on your real estate investing business. We want to help make the compliance process as simple and stress-free as possible. We offer multiple resources on the CTA, including answers to frequently asked questions. For more valuable educational resources, purchase an Infinity Investing membership, which comes with educational tools, such as an adviser strategy session and on-demand training.