If you think about it economically, then this move and the lower limits are really quite straightforward. Money laundering through property surely has some marginal cost. The goal of the federal government here is to reduce money laundering, because any strategy to totally eliminate it would be irrational, because if the goal is total elimination then you're ignoring all other societal costs. (See: war on drugs.)

This strategy makes it more difficult to launder large amounts of money, and that's their goal. Hypothetically, let's say that the overhead to launder a billion dollars is 20%. If this increases it to 25%, then they've effectively taken 50 million dollars out of illegal circulation. That's a heck of a lot more effective than drug busts.

For clarification, I have no idea what the overhead on money laundering is, but I can't imagine it's cheap to move vast sums of money around off the books.

> nearly half of homes nationwide worth at least $5 million are purchased using shell companies

If one does not need a mortgage, this is actually the recommended way to transact on a high-value property. It makes estate planning easier, it somewhat protects privacy, and when it's time to sell, one simply sells the underlying LLC, which ironically is a much simpler business transaction in most states than selling a piece of real estate.

Correct me if I am wrong, but I was under the impression that you can get a mortgage using a LLC, but you do need to go to a private bank and arrange a custom deal for it.

(I seem to recall Zuckerberg doing this for his Palo Alto home with a variable interest rate loan that started with 2% or so)

For clients of that size it's most likely a variant of a pledged asset line http://www.schwab.com/public/schwab/banking_lending/pledged_... at some subsidized rate in order to win their wealth management and private banking business. I mean, if you have significant holdings and if you're okay with borrowing on a floating rate, and if you think you can survive a margin call, Interactive Brokers will lend to you at 0.86% if you park $1m+ of securities with them. https://www.interactivebrokers.com/en/?f=interest You'd be hard-pressed to find a mortgage on similar terms.

It's a mortgage in layman's terms as there's some principal and interest, but in reality the financial institution won't send an appraiser, there's no mortgage deed issued to the bank, the balance and interest payments are not sliced and diced into securities to be resold.

With that said, mortgages for LLCs are the preferred financing instruments for real estate investors, so they're actually a significant line of business for some banks and yes, they're very doable.

There are a lot of banks that will make mortgage loans to an LLC. It isn't common in general though because you would end up paying a higher interest rate (~+2%) since your newly formed LLC doesn't have an established credit record and if you were using the home as your residence you wouldn't be able to deduct the mortgage interest from your taxes. Those to costs would far outweigh any privacy benefit an LLC would afford to the average person.

So, even Mark Zuckerberg can't afford a house in the bay area. /sarcasm

Interesting, how come he had to get a loan at all? Is all of his wealth tied up in investments and Facebook stock?

Or is it that the loan is such a low interest rate that it makes more financial sense to keep making money with his cash through investments, say at ~10% return, to offset the loan interest?

Securing low interest loans to buy assets that appreciate in value with relatively low out of pocket money is basically investing on margin. The ROI on just the downpayment portion is many times more than if you'd lock up all the money by paying the entire amount. A game that only the rich can play.

I doubt it's all tied up, as his last recorded sale (in 2013) http://www.secform4.com/insider-trading/1548760.htm must have left him with quite a bit of cash. So motives are not perfectly clear.

On a macro level, the government penalizes selling of assets at 23.8% (current long-term capital gains + ACA surcharge) and on the other hand encourages borrowing by keeping the rates low and allowing the interest portion to be deducted as an investment expense, so what's a rational person to do?

You borrow against your stock, of course, so you don't have to realise the capital gain yet get access to the cash. If you're worried about downside protection, you can always buy a put option for the stock you pledged at its current value.

Many publicly traded companies prohibit their employees from buying puts or selling calls on their stock, as it misaligns incentives, similarly to how shorting the stock causes you to benefit from a decline in price.

The point of the new rules is to target current money laundering in the easiest way possible. Trying to inspect all real estate transactions would be incredibly expensive and cumbersome for the state.

It’s possible that folks trying to launder money will switch from doing a single $20M transaction to doing 20 $1M transactions instead, and not change their level of overall activity. At the very least it’ll be a pain in the ass for them, though.

This might not be the ideal policy, but it’s easily explainable if you try to look at it from government officials’ perspective. (So I wouldn’t really call it “odd”.)

>Trying to inspect all real estate transactions would be incredibly expensive and cumbersome for the state.

And the titles companies on whom executing this regulation will fall... It's not like they all have the resources to hunt down shell companies all over the map.

Are you saying this will affect the prices in normal real estate markets?