Condominium

Cryptocurrency and the New York Co-op and Condominium Markets

New York-based boutique law firmPardalis & Nohavicka brings the latest legal updates from the world of real estate. Pardalis & Nohavicka handles an eclectic array of cases, representing individuals and business owners in civil litigation, criminal matters and commercial transactions, currently litigate and represent clients in the United States and internationally.

A rare event happened in November 2021: for the first time, a real estate investor bought three luxury condominium properties with cryptocurrency.

The first was purchased at 385 First Ave. without traditional bank lending methods. Magnum Real Estate Group has sold a 9,000 square foot building valued at $29 million in Gramercy Park. As part of the deal, Bitcoin, via Bit pay, was used to pay for the building through an automated clearing program that converted the crypto into currency.

How has crypto affected these transactions? Read on to explore the pros and cons of buying a co-op or luxury condo with cryptocurrency. But first, we need to determine what cryptocurrency is and how it offers an alternative to traditional currency or bank accounts.

What is Cryptocurrency?

Cryptocurrency is a digital asset that appears on a digital ledger called a blockchain. Specifically, it appears on a set of servers and is produced as a non-fungible token (NFT) that can be used to buy and sell assets or services.

Can cryptocurrency be traced or can it remain anonymous?

As a non-digital asset, it can be traced on a digital blockchain, but it can remain anonymous on computer software.

What are the different names for cryptocurrency?

There are many types of cryptocurrencies that need to be converted to US exchange rates. They include Bitcoin, Litecoin, Ethereum, Dogecoin, and Cardano.

What are the advantages of crypto?

In a crypto transaction, a sophisticated foreign investor can complete a real estate transaction 24 hours a day, seven days a week. For example, a buyer could buy a co-op or a condo on the same day without using a bank or wire transfer. . As a result, new technology buyers can complete their transactions immediately, unlike traditional real estate buyers, who have to wait 30 to 90 days before closing a transaction.

What are the disadvantages of crypto?

Crypto is a highly volatile asset that can quickly rise in value. Unlike traditional currency, its rates can be highly variable, meaning it often costs more to acquire than traditional currency in a standard bank loan situation. Additionally, if the cryptocurrency is sold or increases in value, it may trigger long-term capital gains treatment under the Federal Income Tax Code.

Is it possible to buy a condominium or cooperative with cryptocurrency?

Yes and No: Generally, cryptocurrency is not, in and of itself, a type of currency that can be used to purchase a condo or co-op. Rather, it must be converted into cash or a bank-like instrument. Renowned tax attorney Steven Ebert of Cassin & Cassin, LLP notes that you cannot pay for real estate — like co-op maintenance fees or common condo fees — with cryptocurrency.

Additionally, while you could use crypto to deal with the transaction, digitized tokens alone could not pay your mortgage, property taxes, closing costs, or real estate commissions. All of these items should be paid for in US dollars.

What should a buyer do to use crypto to buy real estate?

In reality, real estate investors and buyers need to convert their crypto into cash or a cash equivalent (like stocks or securities) with cash value in order to fund the sale of any real estate, including the purchase of a condo, co-op or townhouse.

What are the tax consequences of crypto transactions?

Under US IRS Code 1001, converting crypto to cash could potentially trigger a taxable profit or gain that may be subject to capital gains tax. Indeed, crypto is a sophisticated digital asset that is often much more valuable than typical US or international currency.

John Jilleba, CPA and partner at a law firm in Westwood, NJ, said people are “liquidating crypto to buy real estate.” Therefore, this transaction may result in a purchaser being subject to capital gains tax.

Is the buyer’s property subject to tax on the contract or property closing date if crypto is used as part of the transaction?

No. The IRS will not tax the buyer for the real estate transaction at the time of the contract or on the closing date. The buyer will only be taxed when the crypto is sold or converted to cash. For this reason, buyers should always consult a tax advisor or CPA before engaging in crypto transactions.

How would a co-op or condo deal be structured in a crypto situation?

Theoretically, the crypto could settle the start of the transaction, but the funded part of any transaction would still have to be handled by the real estate company.

What are the practical implications for co-op and condo buyers using crypto to buy an equity stake in their buildings?

It depends – unless you’re a big real estate investor like our original investor at Magnum Real Estate Investment Company. In a recent article, Ebert suggested that condos and co-ops shouldn’t indiscriminately seek out buyers to use crypto as a way to fund their transactions, as board members and association bylaws might not not allow it.

This could then result in large numbers of potential members being rejected due to the co-op’s or condo’s business judgment rules, which promote loyalty to board members and community concerns.

How would a real estate contract be structured using crypto as a digitized payment device?

It is a very interesting and evolving subject. Currently, local lawyers and real estate agents seem to agree that a regular real estate services contract with addenda would still work. In this situation, the parties should include an addendum to their real estate contract specifying the amount in US dollars to contribute to the transaction; the type of encryption service they would use; and the type of crypto wallet or crypto exchange they have for the transaction.

Most importantly, the contract must contain language specifying that the seller and the buyer are parties to the agreement and that the seller confirms the transfer of funds using a particular cryptographic service, such as Bitcoin or Litecoin – in the event that the buyer and seller had to give up using an escrow account because of crypto.

How is crypto viewed by the courts?

Courts consider cryptocurrency as an alternative form of currency, as evidenced by a case in the Southern District of New York, Owen v. Elastos, 2021 Wl 586871. In this case, a Singaporean company sold ELA tokens as a form of cryptocurrency. However, investor Mark Owens sued the Elastos company for failing to register his tokens as securities, which is a violation of the Securities Act of 1933.

Ultimately, the court found that Elastos was a legitimate seller of cryptocurrency through secondary trading of ELA tokens. This case set a precedent in Federal Court, affirming the validity of cryptocurrency as an alternative cashless payment method. Essentially, the court ruled that crypto was a taxable instrument and subject to income tax.

What does the advent of crypto and blockchain mean for the average real estate investor and buyer?

Having the crypto can make your closing faster and faster, but ultimately you will still have to deal with the consequences of converting your digital asset (crypto) into real money or cash – and deal with the volatility of crypto versus real currency valuation too. This could put buyers in real danger if significant taxes or capital gains are triggered by their luxury real estate transactions.

Then the real question is whether the buyers of the property want to pay a 40% capital gains tax on the liquidation of their crypto assets.

For this reason, all investors or purchasers of real estate should consult with a qualified tax and real estate attorney or licensed CPA before engaging in such transactions. These professionals can review a buyer’s balance sheet to determine if crypto might be a good fit for them before moving forward with their co-op or condo transaction.

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Taso Pardalis is a founding partner of the law firms of Pardalis & Nohavicka, a leading full-service law firm in New York City with offices in Manhattan, Queens and WeWork. Taso may be a well-known lawyer with many cases making the headlines, but deep down he’s a true entrepreneur who believes in supporting the small business community. His areas of concentration are: intellectual property, trademarks, corporate law, business law and real estate law.
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Jacqueline Weiss, a graduate of Union College, received her Juris Doctor from Albany Law School and is admitted to practice in the states of New York and New Jersey. She completed the New York State Basic Mediation Training for Community Mediation and articled with Justice Pineda-Kirwan at the New York State Supreme Court in Queens County. She is now a full-time attorney at Pardalis & Nohavicka. Ms. Weiss has experience in the healthcare field and in defending professional liability claims involving doctors, hospitals and nursing homes.


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