Could NFT’s eliminate Death Duty, Real Estate Fees or Capital Gains Tax?
The rapid increase in the popularity of NFT’s in recent months is undeniable. The whole thing’s so new — the ink’s still dry.
The “democratisation of share investing — Bloomberg”, through the use of online share trading sites like RobinHood which are linked to digital wallets, has taken many by surprise undeniably transforming the industry in under 5 years.
I would suggest startups like nftforproperty.com are about to do the same thing to the real estate industry.
The development of NFT’s (Non-Fungible Tokens), to represent traditional forms of tangible assets digitally on the Blockchain, will enable the real estate industry to be the next logical target for those looking to disrupt traditional markets.
NFT’s were originally used for selling digital assets like digital art or music, proving their ownership with a unique, digitally encrypted signature which is registered publicly on the blockchain. Many argue the technology allows for a more secure, and given their accessability, a more profitable ownership experience as a result.
The use of NFT’s to prove asset ownership is expanding to represent physical object ownership in the real world, making them an exciting alternative method for developing, purchasing and selling real estate.
The recent democratisation of global share markets, and the investment boom in bitcoin and NFT’s, has caused most young people to have at least one (blockchain based digital) ‘hot wallet’ on their phone.
It’s estimated that one-fifth of the UK population now owns digital assets. Given the privacy these technologies can provide however, it’s also anticipated, this number could be significantly higher.
What is no longer in debate though is that the blockchain is here to stay.
As are cryptocurrencies.
The evolution of this new technology is now undeniably the NFT, driven largely by it’s ability to transform asset management.
So let’s explore what precisely NFT’s are, and how well the UK legal setting is prepared to deal with their complexity and rapid growth in popularity.
NFT stands for ‘non-fungible token’.
NFT’s use the Blockchain (a new decentralised, digital global asset/ownership register) to store data and guarantee privacy and security. Although, NFT’s shouldn’t be confused with other uses of the Blockchain, such as Cryptocurrencies.
In fact new, completely unrelated, industries and uses for the blockchain are being explored and developed daily. In the same way as once the internet was unchartered territory, and buying a pizza with a computer was almost unimaginable. The blockchain (on which the NFT technology relies) is, and will, continue to revolutionise the world as we know it.
Simply put, this technology allows the NFT to become the digital representation, or global ownership register, of the asset it represents. In a similar way that the squiggles on our phones recently proved we’d been vaccinated for Covid, and thus were allowed entry to public events. What’s behind those squiggles is a digital register of vaccination (or ownership if you will).
Theoretically anything unique, that can be stored, can be turned into an NFT via a “smart contract”. Think of a “smart contract” just as you would a traditional paper contract, outlining terms, obligations and ownership, but updated to be digitised and represented by 1’s and 0’s. Then stored in a NFT “token” online.
Each NFT generally has only one owner, it’s not divided. To learn more about What an NFT is, please click on the link. — A Beginners Guide to the Next Great Asset Class
NFT’s are appearing in the news on a regular basis, with record-breaking prices for NFT paintings, and with NFT’s being used as marketing tools for popular fast-food chains. A perception could be that NFT’s are simple to create and are just a gimmick, or fad. They are not.
Applying this NFT technology to slow-changing industries like real estate or law will be a game changer, albeit a far greater challenge.
NFT’s are slowly emerging as a new option for real estate investment; from mortgage investors (people offering loans against NFT’s) to commercial real estate projects offering fractional ownership through the public listing of NFT’s, which represent shares and equity participation in a development.
Experiments using NFT’s have been showing up in the real estate industry over the last year or so. Various organisations are testing NFT’s for everything from building projects to lending in order to simplify processes and speed up real estate transactions.
I would go so far as to suggest that real estate agencies could well go the way of the video rental store.
Why list your house with a part time agent for tens of thousands of dollars in fees, only to have it marketed in the local paper and be inconvenienced by hundreds of tire kickers walking through your open home. Why not list it to a global audience of millions of eager early adopters for a fraction of the time and money otherwise required to sell a home traditionally.
We may not be there yet, but remember the first time you tried to watch a video online? There were some issues for sure, but every month you checked back, the streaming got better and better, the content more diverse and our desire to participate stronger.
How many DVD’s do you rent for the average weekend now? Streaming is here to stay, and so are NFT’s. We just don’t know yet how fast this new shift to digital ownership will be.
Should you consider NFT’s for Real Estate investing?
Just like the sharemarket used to be, large sums required to get involved, limited subject knowledge, the need for an intermediary (like a stockbroker) and the hassle of transferring ownership are some of the major drawbacks to investing in real estate for many people.
Buying a home or getting a mortgage currently requires a large quantity of time and paperwork. Several startups are looking to expedite that process using NFT technology, allowing a buyer to take ownership of a piece (or whole) of their chosen real estate in minutes.
It’s true that digital transactions have been prone to cyber fraud from time to time, but to be fair, so have “traditional” transactions.
Through the use of the blockchain, we could all now benefit from much higher degrees of security and data integrity.
Developing technologies that protect both buyer and seller, while making it easier to transfer assets confidentially, without delay and without many of the costs traditional middlemen incur.
Buyers can even borrow against an NFT with blockchain-based decentralised finance or traditional finance solutions, bypassing the hassle required by most large banks when taking out a mortgage.
How do NFT’s for Real Estate work?
The first stage in buying, or selling real estate represented by an NFT, is to make the appropriate legal preparations to guarantee it complies with law. This currently requires the involvement of legal counsel with blockchain experience.
In a race to streamline this process for the consumer, several providers are competing for first mover advantage. No doubt we will soon be seeing sites pop up dedicated to helping you buy, list and sell your real estate.
Startups like the new Estonian based property portal nftforproperty.com may offer a far simpler NFT listing process for real estate within months.
Staying within the boundaries of law is always a priority, but it’s becoming more difficult with the emergence of each new digital technology so beware, and as always, never invest money you cannot afford to lose.
Remember, there was a time, not so long ago, that the digital representation of your wealth, or account balance through online banking was a massive leap of faith. Were those numbers even real? What if the computer crashed? Remember Y2K?
How long did it take us all to get over that? Now we’re waiving our phones at the checkout counter to buy gum.
Any challenges in using NFT’s in commercial real estate?
As we’ve seen with the introduction of new technologies like smartphones and the internet, with good comes the bad, and there will undoubtedly be barriers to the adoption of NFT and blockchain technology in commercial real estate.
Commercial real estate is mostly owned by people of older generations. Needless to say, elderly generations are often less eager to adopt new technology than younger generations.
Nevertheless, as and when real estate investors adopt, or move on, a newer generation of phone hugging investors are well placed to revolutionise capital raising and asset distribution as NFT’s reach maturity.
How do real estate NFT’s perform?
Real estate NFT’s function in the same way as any other NFT. Or in fact like shares in a public company. You can have all of the shares (NFT’s) to own the asset outright, or part thereof.
The latter in my opinion undoubtedly being the safer option for now. Shared risk, shared return. Low fees. Low entry point. Instant market. I could go on..
NFT’s are purchased with cryptocurrency, stored in a digital wallet, and ideally resold for a profit to a buyer with the suitable amount of money when the time is right. Like shares in a public company, only digital and in your direct control. There is no broker, or market required. You can transfer your NFT to a friend over lunch, directly.
Profits are distributed in the same manner as any other type of share-based investment because ownership is a portion of a business.
These profits though (in the case of rental income for example) can be written in to the smart contract when your NFT is created so that you could have a “guarantee” of income from your asset, before you buy it.
Use of NFT’s in mortgages
NFT’s are not widely used in mortgage products. Yet. Although they may well become more popular in the future. LoanSnap was the first to offer NFT mortgages in the form of home equity loans. They process loans in the same way as ordinary mortgages, but instead of merely producing mortgage notes with liens, they issue NFT’s.
Only a few NFT mortgages have been issued thus far, and they are not yet available for mortgage notes or crypto investors to evaluate for their portfolios. LoanSnap, on the other hand, intends to launch bHome, a “stablecoin” that will reflect partial ownership in one of the NFT mortgage notes. Investors will also enable more NFT mortgages by providing cash to future borrowers.
This democratisation of the mortgage market could see billions of dollars injected to the industry by arm chair investors looking to own a small piece of someone’s mortgage.
Imagine being able to fund your mortgage in real time through a hundred, or a thousand small investors all bidding to offer you the best rates and for their accepted return. Perhaps the bankers better watch out too. It has to be far more desirable for a home owner to go to the market, instead of relying on a algorithm at a faceless bank to provide a home.
These developments are not without risks of course just yet, or a significant number of hurdles. There may be casualties along the way. But there are some very smart, well funded people addressing those issues right now.
What’s the future of NFT’s for Real Estate
The NFT real estate boom could turn out to be more than a passing trend; it has the ability to revolutionise real estate for years to come. People living in these virtual communities working to revolutionise the way we interact could help to bridge the gap between the high-tech revolution and traditional paperwork.
Whatever your views are about the NFT real estate boom, one thing is certain: Technology is driving the future of the real estate market. In ways few of us can imagine right now.
Real estate is one of the oldest industries, and it’s not going away anytime soon. There will always be a need for real estate as long as humans exist on the planet.
It’s time to pay attention then to technologies that will change the way the industry attracts money, buyers and sellers.
Look for evolving opportunities around acquiring portions of a mortgage debt, participating in crowd funded developments, building projects, and other group assets as NFT’s gain popularity and some of the early challenges are solved.
What happens to your NFT’s when you die?
One issue some investors may not have considered is how the UK (and other jurisdictions) legal structure manages digital assets upon the death of the owner. Given the number of assets that now have a digital footprint, this is an increasingly crucial subject and highlights the importance of careful estate planning when it comes to assets such as NFT’s.
One of the most important challenges currently, is dealing with access to NFT’s after death, since they can only be accessed using a unique personal key and password.
Given the risk of losing these valuable assets for good, investors should at the very least take a few simple actions to limit these risks. NFT’s are property, and can be included in a person’s estate to be inherited by beneficiaries.
The first step in most cases is to make these assets known to personal representatives. Preparing an inventory that details the assets and how to obtain them will help with estate administration. If NFT’s are not included in an estate plan to be passed on to beneficiaries, they may be sold or liquidated, IF they can be accessed, which may not be the owner’s purpose.
That said, I would argue that one of the main attractions for digitalised ownership is that the assets can be confidential and liquid. Traditional Estate Planning may then not apply if, for example, your next of kin is given the password in advance, or, if the password for the NFT were left in a safe place “to be opened in the event of my death”.
In this case, a substantial asset base could pass quietly, and instantly, to the one(s) intended and may therefore not suffer the indignity of legal interference, delay or cost.
Here again we see a traditional industry such as law and specifically probate law potentially being disrupted with new NFT technology.
Why, for example, pay a lawyer tens of thousands of dollars in fees and perhaps even more in death taxes, to have your wife wait months, or years to gain access to what was, prior to your death, free and accessible tax paid wealth when a simple password swap could deal with the bulk of your asset transfer?
Are NFT’s tax free?
Let’s not get too ahead of ourselves. Another area the law has yet to catch up with the rise in popularity of NFTs is taxation.
There is currently still a lack of legislation and guidelines addressing NFT’s in the UK.
Would we say “opportunity” then?
HM Revenue & Customs (HMRC’s) updated ‘Crypto-Asset Manual’ focuses mostly on cryptocurrency. NFTs are classified as a slightly distinct type of digital asset, and the handbook notes that because they are individually identifiable, they are not ‘pooled’ for Capital Gains Tax (CGT) reasons.
Although the particular tax position is far from obvious, it appears clear that CGT can clearly apply to gains or losses on disposals of NFT’s, and they are doubtless within the reach of Inheritance Tax and other UK taxes. IF they can be identified. Which is where the greatest challenge for slow moving legislators may present itself.
Another tough issue for legislators is determining the actual location of an NFT for tax reasons.
This is a critical problem for owners with a foreign domicile whose assets abroad may be exempt from UK taxation. Getting it yet?
HMRC believes that cryptocurrencies are taxed in the jurisdiction of the beneficial owner, and they may apply the same logic to NFT’s, particularly if the underlying asset is in digital form, but the law is uncertain on this issue.
After all — how does a tax authority reach the “ultimate beneficial owner”, of an asset based on a randomly set, alphanumeric code, of up to 35 characters long. This of course is in essence the “address”, or “owner”, of the wallet that could hold your NFT/property portfolio.
What then if there were dozens or hundreds of addresses like this representing an asset (such as multiple NFT owners of a hotel or company).
Finally, consider the above, and multiple the challenge for the tax authority by the number of people currently owning digital assets in the UK for example (currently 1 in 5 conservatively). That’s a lot of research to find (at least) 13 million “ultimate beneficial owners” and then verify their location to enforce action. If action is needed, or even enforceable.
Final thoughts… hang on for a hell of a ride!
Any way we look at it, this has all the hallmarks of a game changer!
NFT’s are here to stay but just what damage they’ll do to a number of traditional industries remains to be seen.
The legal complexity surrounding so many different aspects of asset digitisation through NFTs extends not only to the examples discussed above, but to other areas of law and commerce, like data protection, privacy legislation, death duty and divorce settlements to name but a few.
It may only be a matter of time before legal conflicts involving NFTs and digital assets occur. It remains to be seen how quickly NFTs will be accepted by the mainstream as a valid ownership class, or, if they’re a bubble waiting to burst. Perhaps, if we follow the crypto example — they will do a little of both.
Even after all the turbulence seen with Bitcoin in the last 5–10 years, the many governments, and their pundits, who said Crypto was little more than a scam, who amongst us doesn’t now wish they spent a grand or two on BTC just 5 years ago to hold on through all the teething issues.
Clearly crypto is here to stay, and, I would argue, so to are NFT’s, and for so many reasons. Some good. Some bad.
I’m interested to hear what you think, and swap some ideas around if this is of interest to you, as much as it is to us…
So if you’d like to know more about NFT’s in general, how to digitise your own assets, raise funds on the blockchain or increase your returns by leveraging a new market, send any questions to [email protected] and follow us on Twitter, and we’ll be happy to share what we know.