Remaining Anonymous in a Real Estate Transaction
Achieving anonymity in a real estate transaction in Texas is difficult -- maybe next to impossible if you finance the purchase – for several reasons.
To have any hope of remaining anonymous, you must create an entity such as a limited liability company. Obviously, if you hold title in your name, you cannot be anonymous.
Unlike some states, Texas does not allow the creation of anonymous entities. The document filed to create an entity requires the names of the managers or directors, or, if the entity is member or shareholder managed, the names of the members or shareholders.
After the entity is created an annual Public Information Report must be filed listing the name and address of each officer, director, member, general partner, or manager.
If you are purchasing a one-to-four unit residential property and financing a portion of the purchase price, most lenders will not loan to an entity. They will require you to purchase in your name. You can transfer the property into your entity after closing, but that will leave a trail in the real estate records. Those records are open to the public. The transfer of title from you to your entity will be immediately available to anyone who cares to look for it.
Virtually all mortgages have a provision in them which prohibits the transfer of title to the mortgaged property without approval from the lender. Very few, if any, lenders will approve a transfer. If you transfer without written approval, it will violate the terms of your mortgage and subject the loan to being called due. It is rare for a lender to call a performing loan due because it was transferred to an entity owned and controlled by its borrower for asset protection purposes, but it could happen.
In 2019 the Congress passed the Corporate Transparency Act, and the Treasury Department financial crimes division (“FinCEN”) is proposing regulations to implement the provisions of the Act.
What those regulations will require is still a moving target, but it will probably require reporting from financial institutions and title companies and perhaps lawyers involved in real estate transactions and in creating entities to report the beneficial owners of real estate and entities to the federal government.
For the reasons stated above, achieving anonymity for a real estate investor is relative, not absolute. To achieve even a modicum of anonymity requires planning, beginning at the contract stage of a purchase, and the willingness to accept additional complexity and expense. It is just not as simple as creating an LLC and deeding property into it.
We will list some techniques which can create a relative degree of anonymity. Each involves additional expense and has advantages and disadvantages.
- Single Limited Liability Company. Creating a limited liability company (LLLC) is the simplest technique and will yield limited anonymity. If a search is limited to review of the tax records to see who owns the property, the LLC will be listed as the owner rather than the person who owns the LLC. You can enhance the anonymity by creating the LLC before the purchase and have the contract and closing records list the LLC as the owner. If you are paying cash, this can keep your name out of the real estate records. If you are financing the purchase, you probably will have to originate the loan in your name, especially if you are purchasing a one-to-four unit, residential property. If you take title in your name and then transfer into the LLC, the real estate records will show the transfer and identify you as the person who made the transfer.
Remember that Texas requires the formation documents of an entity to list the managers or members and the annual public information report must also report the name and address of each member or manager. Anyone who wants to look beyond the surface can find the owner.
- Series Limited Liability Company. Texas allows the creation of an LLC with multiple series. Each series can be segregated from the other series. This helps little with anonymity but it does allow you to protect each asset from liabilities created by other assets. The series LLC can be combined with some of the enhanced techniques listed below to provide additional protection.
- Single LLC with Trust as Manager & Member. To further enhance the anonymity ability of a single LLC, a trust can be created and named as the sole manager or the sole owner or both. This will mean that the Public Information Report (“PIR”) will list the trust as the owner or manager, and not the underlying beneficial owner of the trust. The PIR must be signed by someone but an “authorized person” seems to be all that is required. That could be your lawyer or CPA.
- Two Limited Liability Companies. Using two LLCs can not only enhance your ability to remain anonymous but can further insulate your assets from lawsuits. To use this technique, one LLC owns the real estate. This LLC would have a trust as its sole member and manager with you as the beneficial owner of the trust.
A second LLC manages the property under a management contract. It is the front facing entity and all contracts, leases, etc. are made in the name of this second LLC. The management LLC has little or no assets. This technique further insulates the LLC which owns the real estate because no one interacts with it. Lawyers sometimes call this “privity of contract”. Privity of contract occurs between the parties to a contract. Since the LLC which owns the property is not a party to these contracts, it is further insulated from liability.
Each technique listed above becomes more and more complex to implement and maintain and thus more expensive. No technique can guarantee complete anonymity. However, each technique listed provides more anonymity and can make it difficult and expensive to learn the true owner of real estate.