Exchange of one property with another is permitted under the Indian property law. In addition, the exchange can take place between residential and commercial properties as well. However, such exchanges involve stamp duty and tax implications.
There are two ways through which properties can be exchanged:
1. Exchange Deed: The owner needs to execute an exchange deed (not sale deed), as an exchange transaction and sale transaction are very different.
2. Two Separate Sale Deeds: In this method, you need to pay the stamp duty on both the agreements. The property with higher market value is taken as the value for the purpose of stamp duty. This means, in case of an exchange of a bigger property with a smaller one, the stamp duty will be payable on the larger property’s market value.
In case of a sale deed, the buyer by default bears the stamp duty cost if there isn’t any express understanding between the parties, but in the case of an exchange deed, this has to be resolved through mutual understanding on who pays the cost of stamp duty.
Income Tax Implications
The exchange of immovable properties falls under the ambit of income tax implications. If the property has been held in possession for more than 24 months, the profit/loss under the exchange shall be considered as long-term. But in case of property possession of less than 24 months, any profit/loss shall be considered as short term.
In the case of exchanges that only mentions the differential amount and not the values of the properties, capital gains are worked out by comparing the market value of the property as per the stamp duty with the purchase cost of the property.
In the case of an exchange of a commercial property for a residential property, one must check if the investment value on the residential property is close to the commercial property’s market value, which upon deficiency can be invested in capital gain bonds. Although, any sort of claims and tax exemptions cannot be availed in the case of exchange of a residential for commercial property.
The conclusion: Although you do not get any special tax benefit on the exchange of properties, you can save stamp duty money through an exchange deed.