Welcome to your Residential Real Property quiz!
Read the prompt below, then take the 10-question quiz to test your knowledge of residential real property.
Prompt:
To be reportable, a transaction must involve “a non-financed transfer to a transferee entity or transferee trust of an ownership interest in residential real property.” 31 CFR 1031.320(b). The Reporting Rule defines residential real property as:
(i) Real property located in the United States containing a structure designed principally for occupancy by one to four families;
(ii) Land located in the United States on which the transferee intends to build a structure designed principally for occupancy by one to four families;
(iii) A unit designed principally for occupancy by one to four families within a structure on land located in the United States or
(iv) Shares in a cooperative housing corporation for which the underlying property is located in the United States.
Importantly, each of the four prongs of the definition of residential real property limits the scope of property “in the United States.”
Terms not defined in the Reporting Rule itself are used as defined in 31 C.F.R. § 1010.100, the general regulations adopted by FinCEN to implement the Bank Secrecy Act. The term “United States” is defined in these regulations as including the United States, the District of Columbia, the Indian lands (as that term is defined in the Indian Gaming Regulatory Act), and the Territories and Insular Possessions of the United States.” 31 CFR § 1010.100(hhh).
The phrase “Territories and Insular Possessions” is defined as the “Commonwealth of Puerto Rico, the United States Virgin Islands, Guam, the Commonwealth of the Northern Mariana Islands, and all other territories and possessions of the United States other than the Indian lands and the District of Columbia.” 31 CFR § 1010.100(zz) As a result, practitioners in these locations will need to comply with the Reporting Rule.
The first prong describes “Real property located in the United States containing a structure designed principally for occupancy by one to four families.” As applied, the definition looks to the intended use of the structure and not necessarily the actual use. For example, if five families occupied a structure “designed principally for occupancy” by only four families, the structure would be “residential real property” notwithstanding its actual use.
The second prong describes “Land located in the United States on which the transferee intends to build a structure designed principally for occupancy by one to four families.” Here, the focus is not on the intended use of a structure but instead on the intentions of the transferee.
The third and fourth prongs describe fact patterns more familiar in large cities, including units “designed principally for occupancy by one to four families within a structure” and “shares in a cooperative housing corporation.”
The scope of the definition can make the practitioner’s job more complicated in transactions where the underlying property does not fit neatly into a standard single-family residence.
For example, a five-acre tract of land that contains no structure designed principally for occupancy by one to four families would not be residential real property under the regulation. But the same piece of land would be residential real property if the transferee “intends to build” on that land “a structure designed principally for occupancy by one to four families.”
Similarly, a tract of land that contains a barn and no other structures would not be residential real property. But, if the transferee intends to renovate the barn to convert it into a single-family dwelling, the land would thereby fall within the definition of residential real property.
How can a reporting person know the intentions of the transferee in these edge cases? The Reporting Rule provides the answer when it provides that the reporting person “may rely on information provided by other persons, absent knowledge of facts that would reasonably call into question the reliability of the information provided to the reporting person.” 31 CFR § 1031.320(j).
Prudent practitioners will develop certificates to be signed by the transferee in any transaction where there is a possibility that an otherwise non-residential property might be converted into a residential property.
Importantly, the certification regarding the residential (or non-residential status) of the property will be even more important if the intended use is non-residential. If the intended use is residential, the certification should prompt the reporting person to complete and file the report required by the Reporting Rule. If the intended use is non-residential, and the potential reporting person relies on that claim to refrain from filing, the reporting person could have liability if the actual use becomes residential (or if the person claiming the non-residential use was untruthful).
The bottom line is that practitioners will need to adopt procedures to collect written certifications regarding intended uses to have documentary evidence that supports their decision-making when applying the Reporting Rule.
Example: Change in Use
Farmer Brown sells a one-acre tract to Johnson, LLC, an entity wholly owned by Joe Johnson. At the closing, the closing attorney asks Joe Johnson about the purpose of his purchase. Joe Johnson answers that it is purely for speculative investment purposes. Several months later, Johnson built a single-family residence on the property. A subsequent dispute arises, and FinCEN brings an enforcement action against the closing attorney, arguing that the closing attorney failed to file a report required by the Reporting Rule.
How will the closing attorney demonstrate that he relied on Joe Johnson’s assertion that the property was not intended for residential use?
As this example suggests, it would be prudent for the closing attorney to require Joe Johnson to sign a written certificate that Johnson, LLC does not intend to construct a residential structure on the property. If the closing attorney had such a certificate in his file, the FinCEN enforcement action should come to a positive conclusion swiftly for the closing attorney. Without such a certificate, however, the outcome is less promising for the closing attorney.
The fourth prong of the definition of residential real property describes shares in a housing cooperative association for underlying real estate located in the United States.
Housing “co-ops” in the U.S. account for 6,400 associations that contain 1,200,000 residences. In most co-ops, a purchaser does not buy their unit but instead purchases shares in the cooperative association that owns the building. The Reporting Rule intentionally includes these arrangements when it describes residential real property as including shares in a cooperative housing association.
But not all housing cooperative associations are located in New York City and other large, urban areas. In some areas of the U.S., manufactured housing sites (also called “mobile home parks”) and the mobile homes located within those sites can be owned through a housing cooperative association.
Transactions involving the purchase of shares in a housing cooperative association, whether in a New York City high-rise or in a rural manufactured housing community, will need to comply
with the Reporting Rule.
