What is a deed of exchange?

A deed of exchange can be signed by property owners once they make up their minds to transfer rights to their properties to one another, in the process, becoming the owner of the other person’s property. A deed like this can be worked out between two parties for the purpose of exchanging immovable property, cash and other similar assets. According to the Transfer of Property Act 1882, a deed of exchange is different from a sale deed as the latter involves money changing hands for the transaction. In an exchange deed, only the method specified for the transfer of such property by sale may be used to transfer the property once the exchange is completed.

What is recorded in a deed of exchange?

# The date on which the exchange is made

# Specifications of the asset, including location and area of properties

# Names, addresses and contact details of the parties involved in the transaction

# A statement mentioning the property transaction as an exchange

# Signatures of the parties involved along with witnesses

# Registration fee or stamp duty applied on the transaction

Difference between exchange and sale deeds:

Since exchange transactions are different from sale transactions, the parties involved will have to prepare an exchange deed instead of a sale deed in order to exchange an immovable property. In case one of the involved parties chooses to pay in cash for the immovable property, the transaction will be deemed a sale instead of an exchange. Two properties can however be exchanged by the creation of two separate sale deeds.

Stamp duty implications:

In the case two separate sale deeds are created, the parties involved in the exchange must pay stamp duty for both the agreements. The payable stamp duty is usually determined by the property which has a higher market value. It is up to the exchanging parties to figure out the mode of sharing this levy.

Income-tax implications:

If the owner of an immovable property holds it for over two years, any gain or loss made on the exchange is deemed to be “long-term”. However, if the exchange is done inside two years of acquisition of the property, the profit or loss is regarded as “short-term”. In certain cases, just the differential amount is mentioned in the exchange deed. To arrive at the quantum of capital gains in such cases, the owner must find out the present market value according to stamp duty as well as dig deeper to uncover the cost of the property at the time of purchase. If the owner holds the property for over two years, he/she is entitled to indexation benefits and tax reliefs under sections 54, 54 EC and 54 F.

Principles of property exchange:

For an exchange deed, a minimum of two parties and two properties are required, with each party owning a property. The exchange of properties has to be reciprocal, which means Party A must transfer his/her property to Party B, and Party B must likewise transfer his/her property to Party A. It is possible to substitute movable or immovable property for one another. Each of the parties will receive the property through this transaction without any prior interest and will enjoy the privileges and is “subordinate to the seller’s liability concerning what he gives and the buyer’s rights and liabilities with respect to what he takes”. The exchange will be valid only after the properties are physically delivered to the respective parties.