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Bitcoin Bonanza Hits Real Estate
June 28, 2018
By Jeremy Yohe
It’s been reported that more than 100,000 merchants worldwide accept Bitcoin. Companies such as Microsoft, Expedia, Newegg. Overstock and Subway all accept Bitcoin payments. The cryptocurrency is no longer just a risky investment opportunity for the adventurous. It’s becoming an alternative way of paying for regular things—like real estate. It was only a matter of time before the cryptocurrency made its way into real estate closings on everything from land on Lake Tahoe in California to Manhattan condos.
Bitcoin has gained traction in areas such as Miami, which is a hotbed for foreign investors. These buyers are much more comfortable with the cryptocurrency than American companies. A Miami penthouse was listed in December for 33 Bitcoins—a value of around $544,500 at the time. The seller specified they would not accept any other form of payment. In Seattle, a homebuyer just used Bitcoin and other cryptocurrencies for the downpayment on a home in January.
In September 2017, Kuper Sotheby’s International Realty reportedly became the first brokerage in Texas to close on a home purchased entirely with Bitcoin. Sheryl Lowe of Kuper Sotheby’s International Realty, the agent who represented the buyer in the sale noted, “In all of my 33 years of closing transactions, I honestly couldn’t have expected something so unique to go so smoothly. In a matter of 10 minutes, the Bitcoin was changed to U.S. dollars and the deal was done.”
Title Company Essential to Process
Lowe pointed to the team at Independence Title for keeping everything together. Jay Fitzgerald, general Counsel for Independence Title, said the company has closed a few other transactions involving Bitcoin since last year. Independence Title has educated its escrow officers on what they need to be aware of when facilitating transactions involving cryptocurrency.
“For our purposes, it’s the same as having anyone come in with some sort of currency that doesn’t constitute good funds under Texas regulations,” he said. “There has got to be a conversion. It doesn’t matter if its pesos or Bitcoin.”
While the Bitcoin satisfies the agreed-upon price of the property, Fitzgerald says difficulty can arise when handling the other settlement costs that require payment in U.S. dollars.
“There is some doubling back, and it can cause some timing issues for loan payoffs,” he added.
There are two general ways to convert Bitcoin to cash: buyers may use a payment vendor service like Bitpay or use a Bitcoin investment account. Fitzgerald said Independence Title is considering developing a relationship with Bitpay or other vendors. This would eliminate each seller having to register with the payment vendor service.
“Maybe we can arrange to work within the vendor system so the money from the Bitcoin conversion can be deposited with us,” Fitzgerald said. “That will facilitate seller payoffs or any other fees that need paid. The buyer would still tender the Bitcoin to a conversion service, which would then wire the money to us.”
While the use of virtual currency continues to gain traction, there remains plenty of nervousness around the lack of regulations and understanding as to how gains in Bitcoin are taxed.
In March 2014, the Internal Revenue Service (IRS) issued a notice on virtual currency, such as Bitcoin. The notice provides that virtual currency is treated as property for U.S. federal tax purposes. General tax principles that apply to property transactions apply to transactions using virtual currency. Among other things, this means that:
- Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2 and are subject to federal income tax withholding and payroll taxes.
- Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue Form 1099.
- The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
- A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.
Things to Consider
With more consumers coming to the closing table with some version of a cryptocurrency, it’s important for title and settlement companies to have policies and procedures in place to handle these transactions.
Alan Fields, director of underwriting for WFG National Title Insurance Co., said the first question a title company must ask is about the type of transfer. The deal could either require the conversion of the Bitcoin to cash or be a Bitcoin-for-Bitcoin land exchange between the buyer and seller.
If the buyer has Bitcoin, but the seller wants cash, Fields said the transaction is no different than a “normal” transaction. As title professionals, we are not concerned with what legal assets—stock, bonds, other land, or Bitcoin—may have been sold to generate the funds which are ultimately wired into our trust account. Our concern is receipt of “good funds.”
It gets tricky when it’s a Bitcoin swap for land, because escrow laws in most states say funds must be held by a title agency in a federally-insured account. Currently, there aren’t any insured Bitcoin accounts.
“If you have a buyer that says they want Bitcoin, a seller’s property and a seller that wants Bitcoin, we treat it as a property-for-property swap,” Fields said. “This is how 1031 exchanges were originally handled.”
In this scenario, the title agent will want to make sure the buyer and seller both have a Bitcoin wallet, a software program that “stores” the virtual currency. The sale consideration would be handled between the Bitcoin wallets, and outside of the title agent or escrow officer. The parties would still need to deposit funds for charges and costs that are applicable to the transactions.
Fields encourages title agents to talk with their underwriters if such a deal arises. Although it’s not within the scope of your agency agreement, underwriters are available to help agents work through the special and very detailed escrow agreements unique to a Bitcoin transaction.
An issue with Bitcoin is that its value has been very volatile. After hitting a record high close to $20,000 in December, Bitcoin’s value slipped to just above $6,000 in June. It hovered around $10,000 in March but was fell below $7,500 at the end of March. While the parties can agree on the terms of their Bitcoin for land swap—“I’ll give you 20 Bitcoins for your house”—the title agent is still expected to make various tax and governmental reports. Fields said that the title agent has some responsibility to make sure the agreed value to be reported to the government is “within reason” for the fluctuating values as of the date of closing.
Fields says a title company needs thorough escrow instructions that covers all the variables to protect itself. Instructions should specify that the seller agrees to accept a certain amount in Bitcoin. They should also indicate the Bitcoin wallet to which the currency should be sent.
Additional concerns include:
- Having enough money in U.S. currency to pay-off loans, pay taxes, releases, payoffs, recording fees and other things that require cash—and, of course, your fees.
- What value to enter on the federally mandated Closing Disclosure
- Reporting to FinCEN, the IRS and state tax authorities
Evolving Buyer
Ben Shaoul, president of Magnum Real Estate Group, said the buyer has evolved. They are now younger and want to pay in various ways.
“Cryptocurrency is something that has been asked of us—’Can you take cryptocurrency? Can we pay that way?’” he said. “And of course, when somebody wants to pay you with a different form of payment, you’re going to try to work with them and give them what they want, especially in a very busy real estate market.”
Shaoul was among the first to adopt Bitcoin for commercial real estate transactions. He recently developed hipster condos that he allows buyers to purchase using Bitcoin. In the hopes of attracting younger tenants, Development company Brookliv accepts Bitcoin rental payments for its brownstones. Beverly Hills-based Hubilu Venture Corp. accepts Bitcoin rental for apartments it acquired near the University of Southern California.
A little over a year ago—in a first for Southern California—a buyer used roughly 3,300 Bitcoins to buy a Cape Cod-style mansion in Manhattan Beach for $3.225 million. Had the buyer waited until later in the year, that same number of Bitcoin could’ve bought multiple beach houses, a few penthouse condos and a private island in the Caribbean.
Sites like Open Listings are making it easier to find properties you can purchase with Bitcoin with a search tool that allows you to look for the words “Bitcoin” or “Ethereum.” Experts warn that buying real estate with Bitcoin won’t be simple in every case. Open Listing notes, “Even if you are able to find a seller that’s willing to accept your offer in Bitcoin, it can be tricky to find title insurance and escrow companies who feel comfortable handling virtual currency transactions. To take on your home purchase, they may require you to cash out your Bitcoin so that your transaction can be treated more like a traditional house purchase.”
Ethereum is another digital currency that could disrupt the real estate industry. Ethereum is known for its “smart contracts” that are written on the Ethereum blockchain—the technology behind the cryptocurrency. Ethereum is the second-most-adopted cryptocurrency after Bitcoin, according to Joel Leslie—co-founder and partner of Propify, a blockchain-based real estate marketing solution platform. Unlike Bitcoin, when investors use Ethereum to purchase property, they can stipulate things within the smart contract that are binding and enacted as soon as buyers pay up.
For example, Leslie said sellers can stipulate Ethereum coins are to be transferred immediately following the transaction, and it will happen instantly.
“The evolution of cryptocurrencies will be exciting to see as time goes on,” Shaoul said. “Much like the Internet, we are seeing more of a commonality with just how important cryptocurrency is in the world, rather than without.”
Jeremy Yohe is vice president of communications for ALTA. He can be reached at jyohe@alta.org.
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