Real estate usually has a very high value. Therefore, many purchases are only possible with a bank loan. Once the loan has been approved, the money almost always flows immediately into the seller’s account. However, there are also cases in which prospective buyers want to pay for a property in cash. In this case, you should be very vigilant. For one thing, many criminals use this method to launder money. You would indirectly support criminal offenses. For another, a law on preventing money laundering severely restricts cash transactions involving real estate. If you fail to pay attention to the details, you may face a substantial fine.
In this article, you will learn why cash payments should be avoided. If you nevertheless consider a cash payment appropriate, we provide an overview of the obligations resulting from it.
Money Laundering Through Cash Payments of Large Sums
Money laundering—many people go through their entire lives without being confronted with the issue. The situation is different when privately selling a property. Prospective buyers have repeatedly tried to settle the price in cash. However, this did not necessarily mean that a dubious intention was involved. Nevertheless, a private suitcase of money in one’s own four walls is rare. Therefore, in most of these cases, a money-laundering attempt must be assumed.
Clean Assets Instead of Dubious Income
Money laundering serves the purpose of washing cash. However criminals obtain cash, the money is illicit funds. To turn this into legal income or legal assets, these people try to put the money into circulation. To do so, they either acquire assets. In this way, they generate tangible assets. Or they pay taxes on it in the form of fabricated income that they did not actually have. This case is known, for example, in restaurants. At the end of the laundering process, illicit funds become legal assets.
Study Confirms Need for Action
According to a study by Martin Luther University Halle-Wittenberg, an estimated amount of around 100 billion euros per year is turned from money from illicit channels into clean money in this way. Some of it is allegedly transferred to the accounts of real estate buyers. For the real estate market, the study describes the risk as “particularly high.” To address this problem, the EU has initiated a regulation brought, which Germany transposed into law in 2021 as the newly formulated Transparency Register and Financial Information Act.
No cash payments for real estate—or are there?
The consequence of the legislative amendment is that banks and financial service providers, among others, must scrutinize cash transactions very carefully. They must even keep records and make them available upon requests from investigative authorities. They are obligated to report even a suspicion of money laundering. This also applies to real estate agents, as they broker transactions of considerable size.
If you sell your property through an agent, the agent will observe all relevant legal requirements for you. If you sell privately to a company, it will usually insist on a bank transfer.
However, private buyers might prefer to pay in cash. You may accept this under certain conditions. However, you should avoid doing so. In addition, you may make yourself criminally liable if you fail to report a suspicion of attempted money laundering to the police. Furthermore, you may possibly facilitate the evasion of real estate transfer tax and thus aid and abet tax evasion. So how should you proceed to be on the safe side when accepting cash payments for real estate?
Record relevant data
As a private seller, you should be aware of one circumstance: If you accept a cash payment, you must account for the origin of this sum at the latest when depositing it into a bank account. If you do not have sufficient data available, you may even be guilty of a criminal offense. The notarial contract, which also records the buyer's details, is not sufficient.
If a buyer absolutely wants to pay in cash, you should therefore consider the following points:
- The purchase agreement must stipulate payment in cash.
- Before concluding the contract, have the buyer provide proof of financing (bank confirmation) if possible.
- When signing the contract, record the following details: name, date of birth, current address, telephone number/e-mail address, and nationality (possibly the notary).
- Note the ID card number and make a copy (possibly through the notary).
- Issue a receipt for the amount with specific details about the buyer.
- The retention period for the documents is five years.
- Avoid bonus or extra payments in cash, as these may be intended to bypass taxes or could indicate capital from dubious sources.
- Be particularly skeptical of excessive offers with a request for cash payment.
- Be sure to report suspicious cases to the police or the Federal Criminal Police Office; in the meantime, delay the transaction by a few days.
-Remember that the notary and an appointed estate agent also have a reporting obligation. You can therefore rarely keep cash payments secret.
Avoid penalties
Be sure to comply with these requirements. Private sales are also subject to the law when payment is made in cash. The penalties can amount to a six-figure sum. If you knowingly or unknowingly facilitate an attempted money-laundering offense or fail to report such attempts, the penalty may amount to a substantial portion of the purchase price. Further criminal consequences are also possible.
The safe way: sell property only by bank transfer
As a private property seller, you should avoid accepting cash. If you act negligently or even know of an attempt to violate the law, you face severe penalties. Opt for payment by bank transfer. This also allows you to avoid questions from the bank if you want to deposit a larger sum after the sale.
If you nevertheless have one of your properties paid for in cash, this payment must be recorded in the purchase agreement. You are also required to obtain the buyer’s details and retain them for five years.
A dubious intention does not always have to be behind the request for cash payment. However, strict payment by bank transfer eliminates the suspicion of money laundering and all obligations arising from it.