From parking spots to vacation rental houses and homes, everything will soon be bought with the help of cryptocurrency. Real estate purchased with cryptocurrency is fast becoming popular with buyers, sellers, and investors.
Cryptocurrency can help real estate sellers, developers, and brokers to market and sell properties within the country and abroad. It can be done by closing deals using Bitcoin and other forms of cryptocurrency.
A few of the real estate brokerage firms are starting to sell their clients’ real estate properties for cryptocurrencies such as Bitcoin, among others. For this, the clients should also know how to buy real estate with cryptocurrency. New investment opportunities are lucrative ones, and you could score a good deal by buying and selling 1 bedroom apartments for rent if you invested wisely.
These days, NFTs and various cryptocurrency investment platforms have made it easier and more accessible for anyone to own a property through Bitcoin or Ethereum.
But as the use of cryptocurrency is increasing, it makes a few questions very common. In what places can you spend the cryptocurrency? If you have a decent amount of cryptocurrency lying in the virtual vault, can you use it to buy a property?
Let’s dig deeper into what exactly cryptocurrency is and how it can be used in buying real estate.
What is Cryptocurrency?
Cryptocurrency is a kind of decentralized, online payment system that operates with the help of a blockchain. Crypto can be used for buying goods and services in the same manner as real money. However, it has a con that it is not accepted by all vendors as a real form of payment. Cryptocurrency came into being in 2008, with the advent of Bitcoin. It was created with the intention of having a peer-to-peer payment that did not involve a central bank of a third party.
It is a digital or virtual currency that is made secure with cryptography. You cannot double spend or counterfeit the currency. Several cryptocurrencies are used on the basis of blockchain technology. It is a distributed ledger brought together by a distinct network of computers. The most defining feature of cryptocurrencies is that any central authority does not issue them. This makes them immune to any government manipulation or interference.
Cryptocurrencies face criticism many times due to their usage for illegal activities, exchange rate volatility, and infrastructure vulnerability. But they are also praised for their divisibility, transparency, and inflation resistance.
There is a wide variety available in cryptocurrency now. Some of the most popular ones are Bitcoin, Ethereum and Dogecoin. You can get cryptocurrency through many exchange websites and apps. Many online brokers offer an opportunity to invest in cryptocurrency too.
Pros and Cons of Cryptocurrency Pros
Cryptocurrencies make it very easy for you to transfer the funds directly between two parties. You don’t need a trusted third party like a credit card company or a bank. Then these transfers are secured with a public key, private key and different forms of incentive systems.
In the virtual world, a wallet or account address has a public key while the private key is only with the owner and can be used for signing in transactions. Fund transfers are accompanied by negligible processing fees and users can avoid the high fees levied by banks and financial institutions.
Cons
The cryptocurrency market prices are based on demand and supply. The exchange rate of different crypto currencies fluctuates widely as the cryptocurrencies are meant to come with a high level of scarcity.
How to Buy Real Estate with Cryptocurrency
With a proper setup of legal and tax structuring, real estate listings for buyers with Bitcoin presents a unique opportunity. Bitcoin has huge potential for investors and virtual currency miners. For instance, a large portion of the world’s Bitcoin supply is held by miners and suppliers from China, Japan, Iceland, the Czech Republic, Georgia, and Canada.
Bitcoin and other crypto currencies have a volatile nature. Considering this, miners and investors try to bring diversity in their portfolio. This can be done by investing in real estate and precious metals.
Furthermore, real estate transactions with Bitcoin can be structured and closed efficiently. This is often faster than a transaction relying only on dollars. This is especially the case if there is a real estate transaction involving a foreign buyer.
The trick is to know how to structure a real estate transaction using Bitcoin as the payment method. This can be done in two ways. The first is all Bitcoin real estate transactions and the other is Bitcoin and USD transactions.
Can You Consider Bitcoin as a Payment Method for Real Estate Transactions?
The first option which involves only Bitcoin includes a number of risks and hurdles. These are associated with the current legal and tax status of Bitcoin. It also requires the seller to accept Bitcoin as the payment method for the transaction. This method is attractive if both the buyer and the seller are Bitcoin enthusiasts.
In the second option, the Bitcoin holder can purchase any real estate listing in the US. The only requirement is that the holder should have the requisite due diligence. This option is closely related to the traditional process of real estate transactions in the U.S. This is an easier and more attractive option for all sellers and those sellers who have local and international digital properties.
Some Myths You Should Be Aware Of Myth 1: It can be misused
It is a myth that since cryptocurrency has a semi-autonomous nature, it can easily be used in a number of illegal activities such as money laundering and tax evasion.
A benefit of this anonymity is that cryptocurrency can also be used for keeping anonymity safe and it offers multiple benefits like total privacy protection for whistleblowers as the identity remains anonymous.
Another myth is that Bitcoin transactions cannot be traced. If truth be told, cash is the most private means of doing transactions. Virtual currencies are less private.
According to Jason Weinstein, a former federal prosecutor and Deputy Assistant General in the Department of Justice’s Criminal Division, Bitcoin and blockchain are quite beneficial for law enforcement agencies. The most obvious benefit is that blockchain allows one to trace all transactions involving a bitcoin address. It can be traced back to the very first transaction.
This provides law enforcement agencies the records needed for following and tracing money, in ways not possible with cash. So, you can track your payments in case you prefer purchasing real estate with cryptocurrency. However, we’d still advise you to consult a professional who knows every detail of Bitcoin transactions and processes.
Myth 2: Bitcoin is not regulated in the U.S.
Most people think that Bitcoin is not regulated in the U.S. This is wrong. In the U.S, Bitcoin and its transactions are regulated by the following:
- Financial Crimes Enforcement Network (“FinCen”)
- US Office of Foreign Assets Control (“OFAC”)
- Commodity Futures Trading Commission (“CFTC”)
- Internal Revenue Service (“IRS”)
- Individual states
Learn How Cryptocurrencies are Taxed
Most cryptocurrency is volatile which is why investors are more interested in investing in crypto and making a profit by buying and selling it. They prefer it over traditional money. This is just like stocks when you buy and sell them in the hopes of making a profit. IRS considers cryptocurrency as a capital asset, which makes it subject to capital gains tax.
If you profit from selling an asset, it will be capital gain. If you buy and sell an asset within the same year, it will be short-term capital gain. Keeping an asset for more than a year and profiting from it comes under the category of long-term capital gain.
Your capital gains tax will vary based on the duration for which you owned the asset as well as the costs associated with it.
Buying a Real Estate Property with Bitcoin
For this, you must search for title insurance and escrow companies that handle cryptocurrency transactions and don’t just focus on cash. If you find these, chances are that the transaction will be in Bitcoin or Ethereum. There are very few instances of cryptocurrency other than these two. If you want to know how to buy real estate with cryptocurrency, these are the only requisites.
Pros of buying real estate with Bitcoin
Get a more secure asset
Crypto value is volatile which means that it changes frequently. Thus, the Bitcoin value can drop more than what you paid for it. Or it could also become more valuable. Its value faces fluctuations daily.
When you buy an asset or 1 bedroom apartment for rent purposes, later on, you are exchanging a volatile asset with a more secure one. Granted that real estate value grows much slower than cryptocurrency, but it is also less likely to depreciate as compared to cryptocurrency, thus tilting the transaction in your favor.
Potential discount
If you find a seller with cryptocurrency, chances are they might also offer you a discount. If sellers expect to get profit from the cryptocurrency you have offered to them, they might even accept a lower price for the house on sale.
Faster purchase speed
When you buy a house with cash, you can pay with crypto and speed up the buying process by cutting out all the mortgage procedures. If you have enough cryptocurrency for purchasing the home, it makes your case and offer stronger.
Challenges You Might Face While Buying Real Estate with Bitcoin Volatile nature of Bitcoin
Since all forms of cryptocurrency are volatile, its value can increase or decrease quickly. The value can fluctuate when you are buying the house. Because of this uncertainty, the seller might not be interested in crypto as a form of payment.
Real estate usually offers profit and sellers can get much more than what they originally paid for it. If they accept cryptocurrency in exchange for the house, the chances of them making a profit are not 100%.
Unfamiliarity with digital currency
Cryptocurrency has been around for more than a year now but only now has it been gaining momentum. Many people are still hesitant to go ahead and carry out any sort of transaction in cryptocurrency, especially if it’s their first time.
It can be difficult to find insurance and escrow companies willing to deal in cryptocurrencies. Those who do understand the workings of cryptocurrency may still be unwilling to go ahead with cryptocurrency. The reason for this can be because of digital currency and the anonymity associated with it. Although the cryptocurrency transactions are recorded in the blockchain, they are tied to an ID and not a name.
Sellers may find it difficult to trace the origin of money if it is not traditional paper money. Since the origin of the money can’t be easily proven, it is readily accepted by sellers.
Real Estate Transactions with Bitcoin
You have two different options when it comes to considering real estate transactions with Bitcoin:
Option 1: All-Bitcoin real estate transaction A purchaser will transfer the Bitcoin from his digital wallet to the seller’s. You may also need to make the transaction to an attorney or escrow agent.
In an all-Bitcoin transaction, if the buyer is a U.S tax resident, he will have to pay income tax as a result of the transaction.
Option 2: Bitcoin- USD real estate transaction
If a seller is unwilling to trade in Bitcoin, they can ask the buyer for conversion of his Bitcoin into dollars. This will be used for a down payment, closing balance, expenses and transfer taxes.
If the buyer is not from the U.S, this can prove to be a bit of a challenge. You’ll first have to open an account in the U.S, and then, convert the Bitcoin holdings to dollars.
The Takeaway
Bitcoin can be an advantage for home sellers if they wish to approach investors with Bitcoin holdings. It can help set their listings apart and attract new purchases using the Bitcoin worth millions of dollars.
If you’re looking into cryptocurrencies, it will most probably be Bitcoin or Ethereum. Cryptocurrency is still a newer method so finding an insurance company or seller dealing in Bitcoin or Ethereum will be a bit hard. Lesser-known cryptocurrencies will be even harder to deal with.
The good news is that sellers are more willing to work if you make the “cash out” offer. For instance, 22 Bitcoins might sound intimidating but once these are sold and converted to cash, it may seem a much more enticing offer.
Original publication: 2021-09-08
