Buyer Beware: More Disclosure Requirements for LLCs

Disclosure Requirements for LLCs

It has become increasingly difficult for homebuyers to play hide-and-seek in New York. For decades, the wealthy, celebrities, and other people concerned about their privacy have enjoyed the privilege of anonymity by buying and selling real estate through limited liability companies (“LLCs”). Not only have LLCs, when properly structured, offered privacy, but, as their names imply, they have had the advantage of shielding their owners from a variety of personal claims.

The use of LLCs for anonymity was curtailed by the New York State Legislature on September 13, 2019, with the enactment of expanded disclosure requirements for LLCs buying or selling certain residential real property.

Prior to the passage of the legislation, New York City required that NYC tax forms for the transfer of any type of property (residential, commercial, condominium units, cooperative apartments, etc.) located in New York City to or from an LLC be accompanied by documentation providing the names, addresses and tax identification or social security numbers of all members of the LLC. However, those members were not required to be natural persons.

The New York State legislation takes things a step further. If an LLC transfers a residential building containing one-to-four family dwelling units (even if the property is partially used for commercial purposes), then the documentation that accompanies the NYS transfer tax forms must identify the names and addresses of all of the members, managers and “authorized persons” for the LLC, and if any member of the LLC is itself an LLC or other entity, then a list of all shareholders, directors, officers, members, managers and/or partners of that entity must also be provided, until the ultimate ownership by natural persons is disclosed. An “authorized person” means a person, whether or not a member, who is authorized by the operating agreement (or otherwise) to act on behalf of the LLC. A “natural person” means a human being, as opposed to an artificial person (e.g., corporation, partnership, d/b/a, estate, trust) who is the beneficial owner of the property.

How Does This Affect You?

Sellers and buyers of individual condominium units and cooperative apartments can relax somewhat. These transactions have been expressly excluded from the expanded NYS disclosure requirements. However, care should still be taken because NYC continues to require disclosure of the members of the LLC, but the members do not have to be natural persons.

Individual buyers of other types of properties wanting to remain anonymous may accomplish that objective by purchasing through a trust. Since the name of the trust and trustees must be disclosed on the transfer tax forms (and the deed to be recorded), make sure that the name of the trust does not identify the buyer and that the buyer is not the trustee.

For investors who want both privacy and protection from their exposure to liability, ownership through a limited partnership or corporation may be considered, although such entities may have negative tax implications and may not afford complete anonymity.

When deciding to create a trust, limited partnership, corporation, or any other entity to purchase or sell property, we encourage you to speak with an attorney and an accountant to discuss the legal and tax implications.

For more information on this topic, please consult your Cooperative and Condominium Counsel at Smith, Gambrell & Russell.

 

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