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Posted by Jim McClaflin, EA, NTPI Fellow, CTRC

How Cryptocurrency in The Real Estate Industry Works

How Cryptocurrency in The Real Estate Industry Works

Given the disruption of blockchain in financial services and their subsequent widespread application across industries, it's hard to find a segment that the technology hasn't influenced. Cryptocurrencies have had a major impact on payments, remittances, and exchanges. Initial coin offerings (ICOs) have led to equity investments, initial loans, and venture capital. The food supply chain industry has also been affected by blockchain.

The real estate sector has not escaped the blockchain either. Previously, trading high-value assets, such as real estate, exclusively through digital channels was never the norm. Real estate transactions are typically conducted offline and involve face-to-face engagements with multiple entities. Blockchain, however, has opened up ways to change that. The introduction of smart contracts on blockchain platforms now makes it possible to tokenize assets such as real estate and exchange them as cryptocurrencies, such as bitcoin, UST, and ETH.

Real estate trading in this way varies. Here are some of the ways blockchain has changed the real estate game.


Platforms and marketplaces

Traditionally, real estate technology has focused primarily on advertising and connecting buyers and sellers. However, blockchain introduces new amazing ways to trade real estate and may enable online trading platforms and marketplaces to comprehensively support real estate transactions. For instance, ATLANT has developed a blockchain platform to facilitate real estate and property rental transactions. By tokenizing real estate, assets can be traded in the form of shares on the stock exchange, and transactions can be done online.


No middleman

Lawyers, brokers, and banks have long been part of the real estate ecosystem. However, according to a Deloitte report, blockchain may soon introduce a change in its role and share in real estate transactions. New platforms may eventually take over listings, payments, and legal documentation. Eliminating intermediaries will ensure that buyers and sellers get more for their money, saving the fees and commissions charged by these intermediaries. It also makes the process much faster, as the back and forth between these middlemen is eliminated.


Liquidity

For a long time, the real estate sector was considered an illiquid asset as sales have been closing for some time. This is not the case with cryptocurrencies and tokens, as they can theoretically be easily exchanged for fiat currencies through exchanges. However, like tokens, real estate can be easily traded. A seller does not have to wait for a buyer to pay for the entire property to get something of value from their property.


Fractional Ownership

By enabling co-ownership, blockchain also reduces barriers to real estate investing. Investments usually require a large sum of money upfront to purchase a property. Alternatively, investors can pool their money to buy higher-value properties. Thanks to blockchain, investors simply need to log into a trading app to buy and sell even fractional parts as they see fit. In addition, joint ownership would help them avoid property management, such as maintenance and rent.

Maintenance alone can involve high costs, and the relationship with tenants can be a problematic undertaking. It also affects related activities, such as lending, where owners often have to pledge their property as collateral in order to have quick access to cash. Under the terms, owners can continue to enjoy the use of their property.


Decentralization

Blockchain builds trust and security as a decentralized technology. The information stored on the blockchain is accessible to all colleagues in the network, which makes the data transparent and immutable. One only has to go back to the real estate bubble that burst in 2008 to see how greed and a lack of institutional transparency can have catastrophic consequences. A decentralized exchange trusts the system. Since colleagues can verify the information, buyers and sellers can be more confident when transacting. Fraud attempts would also be reduced. Smart contracts are becoming more and more admissible with the passage of this legislation in Vermont and Arizona. As such, smart contracts would have greater applicability beyond the technology itself.


Costs

The transparency associated with a decentralized network can also reduce the costs associated with real estate transactions. In addition to the savings made by reducing professional fees and intermediary costs, there are other costs such as inspection fees, registration fees, borrowing costs, and associated real estate costs. These costs also vary depending on the skill area. Intermediaries can be reduced or even eliminated from the equation, as platforms automate these processes and bring them into the system.

The real estate market is worth trillions of dollars, but large and wealthy corporations dominate it. Thanks to blockchain and crypto technology, it is possible for more people to access a market where transactions can be more transparent, secure, and fair. Real estate transactions could eventually become true peer-to-peer businesses, the blockchain-based platforms that do most of the work.


Cryptocurrencies and the IRS

Transactions in virtual currency are taxed by law, as are transactions in any other property. Taxpayers who engage in virtual currency transactions may be required to report such transactions on their tax returns.


What is Virtual Currency?

Virtual currency is a digital representation of value that serves as a medium of exchange, a unit of account, and/or security deposit. In some contexts, it functions as "real" currency (i.e., currency and paper money of the United States or any other country designated as legal tender, circulates, and is commonly used and accepted as currency in the country of issue) but is not legal tender in the United States. Cryptocurrency is a virtual currency that uses cryptography to validate and secure transactions recorded digitally in a distributed ledger, such as a blockchain.

Virtual currency with an equivalent value in real currency, or substitutes for real currency, is called "convertible" virtual currency. Bitcoin is an example of a convertible virtual currency. Bitcoins can be exchanged digitally between users and purchased or exchanged for US dollars, euros, and other real or virtual currencies.


Tax Consequences

The sale or other exchange of virtual currencies or the use of virtual currencies to pay for goods or services, in this instance, real estate, generally has tax consequences that may give rise to tax liability.


Summary

  • Blockchain technology has affected the real estate industry in many ways, including providing new ways to connect buyers and sellers.

  • Blockchain can be used to remove middlemen from the real estate transaction process, thereby reducing costs.

  • This technology can also help codify the practice of co-ownership of real estate.


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Jim McClaflin, EA, NTPI Fellow, CTRC
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