En Gumper we want to address a current topic such as property exchange. In times when the real estate market has some instability due to the economic crisis resulting from the pandemic, more and more people are looking for alternatives in housing to the traditional transactions of buying or selling a property.

Property Exchange: An Option in Times of Crisis

  Almost like in a movie production, where we saw Kate Winslet exchange homes with Cameron Diaz in The Holidays, the simplest way to explain what property exchange is is precisely this, an exchange of properties in which there is no economic transaction, just property for property.

Real estate exchange is a very old contractual figure within civil law and corresponds to what is also known as exchange of real estate. In simple terms, when we talk about what exchange is, we refer to an agreement in which two owners exchange homes, commercial spaces, or land without the need to carry out a traditional sale with money as the main medium.

This type of operation, also known as land exchange or property exchange, can include differences in value that are compensated financially, but its essence remains the direct exchange of real estate assets.

In the current market context, the exchange has become a strategic alternative to traditional buying and selling, especially in situations where owners seek to change homes without incurring large financial costs or without the need to access a conventional mortgage.

  From a legal point of view, this practice is included in the Civil Code regarding the exchange of goods in article 1538. In this specific article, it is stated that the exchange must occur between two individuals and that one must deliver a good to the other. In the case of the so-called real estate exchange, both individuals must be the owners of the property.   Despite the fact that this year 2021 is seeing a greater number of real estate transactions, due to the desire of many consumers to change properties, it is true that the economic situation is also somewhat complex for many people, which is why alternative options to buying and selling are becoming more present in the market, something that did not happen with the same frequency before.  

How can I make a property exchange?

  As we have mentioned, the property exchange has a fundamental requirement, which is that both parties interested in making the property exchange must be owners of the property on which the change will take place.   The real estate exchange is a mutually agreed contract to exchange a property; it may seem difficult to change homes in this format, but we will now provide an example that is currently occurring quite frequently.  Many families, due to confinement, have become aware that their housing needs are quite different from what the property they have acquired provides.   It has also become evident that many elderly people are living alone or in quite isolated areas, so a housing swap can be a great option to find what each of them needs.  

The process of the housing swap

  To initiate the process once the exchange has been agreed upon by the parties, we must analyze the acquired property, as well as the burdens it may present. Since the housing swap does not exempt from the settlement of mortgage burdens on the properties.

Who is responsible for the mortgage in a housing swap?

  If there is a mortgage burden on one of the properties, it will be the responsibility of the recipient of the property to assume the mortgage subrogation. It may also be the case that both properties have a mortgage burden. In that case, both new owners must assume the mutual subrogation of the mortgages. Any party that must assume the mortgage of the property can enter into a new mortgage agreement, as well as take out a new mortgage or settle it, although this last scenario occurs less frequently because this type of transaction seeks to minimize costs as much as possible.  

Are there costs associated with a housing swap?

  Like all transactions between individuals that have a commercial value, a series of procedures must be carried out that incur additional costs to the operation.   We usually have to assume the following costs:  

• The so-called Property Transfer Tax and Documented Legal Acts. This tax will apply to both properties. One of the highlighted aspects of the tax payment for this real estate modality is that, being a contract between individuals, it is exempt from VAT.
• Municipal Capital Gains Tax: This tax, which must be paid in other real estate transactions, is no exception in the property swap and must also be paid.
• This tax must be measured based on the profit or loss resulting from the exchange of the property. Since there may be a capital loss or gain, this tax must be applied to the difference between the acquisition value of the property being transferred and the value obtained from the swap.
• Registration and notary: The transaction of the swap must be registered at the notary’s office.
• Expenses arising from the subrogation of the mortgage, cancellation, or novation costs must be resolved.
• Unbuilt land. In the case of unbuilt land, there is an exception regarding the payment of VAT, corresponding to the delivery of the plot.

 In terms of expenses and procedure, the property swap presents many similarities with the usual buying and selling processes. The most complicated part, however, is finding a property that meets the necessary characteristics to fit the search and at the same time locating a property available for this type of real estate transaction.   At Gumper, we have extensive real estate experience which allows us to be high-value advisors when searching for the desired property.   We can also provide advice on the different aspects of the property swap process since, at the documentary and tax level, it involves considering many factors to ensure that the exchange experience is satisfactory for both parties.