Cryptocurrency continues to get many new use cases, including its involvement in the real estate market. In principle, conducting a transaction is easy since the only thing needed to complete the transaction is for both parties to agree to use crypto. While this is true, purchasing property involves several steps that aren’t common in other large ticket purchases.
Before jumping the gun, here are a couple of key things buyers should know before they buy real estate with bitcoin.
You will want to know how cryptocurrency works.
Cryptocurrency is trendy among savvy investors. However, it also requires a little bit more research than traditional platforms. Investors will need to understand how a digital wallet works and where they can buy and sell their tokens. Cryptocurrency wallets are software programs that store a user’s public and private keys to send money and conduct transactions. The unique thing is that, unlike traditional wallets, digital wallets don’t store the actual cryptocurrency. Instead, they store the records of the transactions users have conducted.
Next, Buyers should consider how a cryptocurrency transaction works. When using crypto as payment, Buyers will sign away the ownership of their currencies to a new user’s wallet. To verify these funds belong to the Buyer, the private key in their wallet must match the public address assigned to the cryptocurrency. When the keys match, the balance of the Buyer’s wallet will decrease, and the receiver’s will increase. Wallets can take many forms, including a software, hardware, or paper wallet.
Cryptocurrency exchange platforms operate similarly to a traditional brokerage; however, starting small will only benefit the investor.
You will likely want to engage an escrow service.
Unlike fiat currency, Buyers can’t hold digital currencies in trust accounts. When you pay funds to your lawyer when purchasing a property, the money is held in this special trust account until you and the Seller finalize the details. The accountability of a third party is even more so needed when transactions involve blockchain due to the technology’s immutability. In the cryptocurrency world, a comparable service is the use of professional escrow agents. Escrow agents should be involved in any big-ticket service that requires the completion of several conditions since they hold funds in a secured account. Therefore, if the Seller does not transfer the house’s deed or decides not to complete the home inspection, the escrow service will not release funds to the Seller.
You will have to plan for volatility.
Cryptocurrency has the reputation of being extremely volatile. Market volatility means that if the Buyer and Seller set a price in crypto, the Buyer or Seller may lose out in the event of a price dip. For example, a home selling for 500,000 may be the equivalent of 10 bitcoins at 50,000. However, by the time the paperwork goes through, the coin may only be worth 30,000 and need more bitcoin to pay down the house. Since cryptocurrencies aren’t legally regulated, it can be next to impossible to estimate the future price of the assets.
First-time homebuyers are encouraged to set the price in fiat money and transfer the equivalent amount of crypto at the close time. Setting a value in fiat currency will protect Buyers until the Seller has transferred the title. Alternatively, some users use a cryptocurrency exchange to convert their crypto holdings into fiat money right away.
You still have to pay taxes.
There are still many uncertainties around how real estate transactions involving bitcoin work for taxation purposes. Typically, the government will base land transfer tax on the original purchase price of the property. If you pay for a home with 50 bitcoins, the price could vary drastically, depending on the time of calculation. In Canada, the government still values properties in Canadian currency for tax purposes. In comparison, the U.S. considers each crypto transaction as capital gains tax. But, the tax treatment will differ in other countries. Therefore, a tax professional or experienced accountant may need to be engaged ahead of time.
However, in the near future, Ethereum announced in March that a program might be on its way to enable mortgages. Loaning money directly in cryptocurrency might be a way to earn some tax breaks.
Although there is still some risk involved with the trading of cryptocurrencies, many continue to sell their buy and sell homes with bitcoin. The ease of use to transfer large sums of money without borders and low transaction fees still outweighs the potential drawbacks of its use.
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