Two years ago, the legendary Warren Buffett appeared on CNBC to offer his outlook on the cryptocurrency market. Buffett stated that "In terms of cryptocurrencies, generally, I can say with almost certainty that they will come to a bad ending.” Well, here we are two years later receiving news that the leading mortgage lender in the U.S, United Wholesale Mortgage is planning to accept bitcoin payments by the end of the year. Were Buffett’s predictions wrong? Will bitcoin take over all currencies? And how will this affect the housing market? All your questions will be answered, stay tuned.
This would make it the first major nationwide mortgage lender to offer this service. The company’s CEO Matt Ishbia stated, “We’ve evaluated the feasibility, and we’re looking forward to being the first mortgage company in America to accept cryptocurrency to satisfy mortgage payments.” The company is planning to accept bitcoin to start, but will soon evaluate ether and other cryptocurrencies as well.
For those of you that have no idea what bitcoin or cryptocurrency is, it’s a digital currency based on blockchain technology that can be used to buy goods and services that uses decentralized control, which means they aren’t controlled by one person or the government.
This begs the question, how in the world is this supposed to work? Well as of right now, UWM hasn’t broken down the exact step by step process to purchase a home with cryptocurrency, but there have been a few real estate transactions done around the nation doing so. It’s important to understand that you truly only need two parties to agree in a transaction, a buyer and a seller, to agree on the payment method.
As far as the few transactions that have happened already, they used a global bitcoin payment service provider called BitPay that would convert bitcoins into dollars, whereas other parties accepted bitcoins to increase their investments. A pro to this process is skipping the banking system altogether so turnaround times tend to be a little quicker.
One of the cons is that if a transaction needs to be reversed due to any litigation, bitcoin transactions are not considered reversible. Jake Bryan, a bitcoin consultant, envisions having an open-sourced mortgage contract that parties would interface rather than using a traditional contract, so no third party is necessary after the contract has been signed.
Another popular question is, how is bitcoin taxed? Well it depends on the country, but in the U.S, the IRS considers it to be property, so every transaction would be calculated as a capital gains tax according to Jake Bryan. There are services out there to simplify the process, but I’m sure that will be another fee calculated later down the road.
Capital gains tax, if you don’t know what it is, it’s essentially a tax on any gains you profit after the sale of an asset, like real estate, bonds, jewelry, coin collections, or stocks. In real estate, it becomes exempt from capital gains tax if the home is considered your primary residence.
According to the IRS, your primary residence is a home you have lived in for at least 2 of the last 5 years. Keep in mind, however, that this exemption can only be used once every 2 years, and there is a monetary limit to these exemptions.
If you’re single, $250,000 of gains on the sale of a home are excluded from taxable income. This means that if you buy a home for $350,000 and 3 years later, you sell it for $550,000 the capital gain would be $200,000. This is under the $250,000 limit, so you wouldn’t pay any capital gains tax. If you’re married, $500,000 of gains on the sale of a home are excluded from taxable income. However, if you go above that amount, you’ll have to pay gains tax on anything above it.
The capital gains tax is anywhere from 0-20% depending on if you’re exempt, so it's well understood why some people wouldn’t want to use bitcoin to purchase a home just based on that tax alone.
Now that I've thrown all that information out there, what are the pros and cons of buying a home with Bitcoin? Starting with the pros, as I mentioned, the speed to purchase is much quicker as it knocks out the banking system. Number two, you may get a discount, as sellers will expect the value of bitcoin to rise, there may be more room for negotiation. Lastly, Like I have already mentioned a little bit, you would be exchanging a more volatile asset for a less volatile one, meaning home values are steady, while the value of a bitcoin changes regularly.
Moving along to the cons, you may find difficulty finding title insurance or an escrow company to help you out. Number two, cryptocurrency lacks legal protections, and as I mentioned about volatility, you may be spending a lot more in bitcoin than originally planned based on the fluctuation of value. Lastly, you may struggle to try and find a seller that is willing to accept bitcoin for their home.
It’s said that cryptocurrency is risky and made for the adventurous, but there’s over 100,000 merchants worldwide that accept bitcoin, Microsoft and Expedia just to name a few. Are they all “adventurous” or do you think these companies and UWM are shaping the future for cryptocurrency to take over all currencies? Do you think there will be a downfall like Warren Buffett stated? Drop all your thoughts in the comments, I’m curious what everyone has to say about the topic.
Andrew McManamon is a Michigan REALTOR® with Signature Sotheby’s International Realty and provides real estate services to Buyers, Sellers and Investors throughout SE Michigan including Livingston County, Oakland County, Washtenaw County, Genesee County & beyond. Andrew has become one of the rising stars of Michigan real estate agents. Prior to his real estate career Andrew was responsible for managing a senior living facility in Brighton, Michigan as a dining supervisor and an activities assistant. Andrew’s passion to help people is unlike any other, and he continues to strive to be best resource he can be. Andrew graduated from Cleary University in Howell, Michigan with a double major and currently resides in White Lake, Michigan.