EN
ITA exchange is a contract defined in Article 1552 of the Civil Code as an agreement concerning the mutual transfer of ownership of property, or other rights, from one contracting party to the other. In common practice, this legal transaction represents the evolution of barter and is a contract that transfers ownership with real effects.
The main difference between a exchange and a sale lies in the nature of the consideration: whilst a sale is based on the exchange of goods for a cash price, an exchange of goods involves a direct exchange of goods for goods or rights for rights. In effect, an exchange is a transaction that excludes the immediate monetisation of property in favour of the circulation of goods in kind.
To understand how a property exchange works in the property sector, it is important to note that this transaction enables two parties to transfer ownership of two properties to one another through a single notarial deed. Compared with the traditional sequence of transactions – consisting of a sale followed by a new purchase – a property exchange offers a significant advantage in terms of timing, as it simultaneously resolves the housing needs of both parties and eliminates the risk of being left without accommodation during the transfer of ownership. The following sections will examine issues relating to any price adjustment, taxes and the practical details of the deed.
The legal nature of the contract and Article 1552 of the Civil Code
The legal nature of the contract does not require the properties exchanged to have an identical economic value. In order for the exchange to be a fully valid and balanced contract, including from a tax perspective, the rules governing exchanges distinguish between two scenarios based on whether or not monetary compensation is involved:
- exchange without payment: this occurs when the parties consider the two items to be of equivalent value, simply transferring ownership of the items to one another without any exchange of money;
- exchange with a cash adjustment: this occurs when the contracting parties note a difference in value between the properties and decide to make up the difference by paying a sum of money in addition to the property itself.
The presence of a cash adjustment requires a careful assessment of the overall contractual intent. Case law establishes that the legal nature of a exchange contract remains intact if the primary objective of the contracting parties is the exchange of assets, with the cash serving a purely ancillary and supplementary function of rebalancing. If, on the other hand, the cash component plays a predominant role or exceeds the economic value of the asset transferred, the transaction may be reclassified by the tax authorities from a exchange to a sale or a mixed contract, with the rules of the predominant contract type applying.
Property exchange between private individuals, house swap and purchase of a future property
The exchange scheme can be applied both in ordinary dealings between citizens and in commercial transactions involving construction companies. This direct exchange allows for an immediate transfer of ownership without complex financial intermediation.
In a property exchange between private individuals, the parties determine the value of the assets in order to establish the exact balance of the transaction and to specify any adjustment in the deed. The exchange of a present asset for a future asset is also very common. This typically takes the form of an exchange of building land or a plot of land (representing the present asset) transferred to a developer in exchange for one or more property units yet to be built on that land (representing the future asset).
In this specific case of an exchange involving a future asset, the legal effects occur in two distinct stages:
- the transfer of ownership of the land to the developer takes place immediately, as this involves an exchange of an existing asset;
- The transfer of ownership of the future house remains conditional, resulting in a deferred effect of the future asset until the building is actually constructed and comes into existence.
Trade-in costs and tax relief for first-time buyers
The costs involved in a property exchange are one of the main reasons why it is more cost-effective than carrying out a separate exchange and sale, as the transaction benefits from a favourable tax regime.
In the case of a property exchange between private individuals that is not subject to VAT, stamp duty is not calculated on the sum of the values of the two properties exchanged, but is applied only once on the taxable value of the property that gives rise to the higher tax liability. The applicable rates are calculated on this value, including the ‘first-home relief’ at 2% or the standard rate of 9% in the absence of ‘first-home relief’ for other properties. In all cases, the tax authorities assess whether the value of the properties is correctly balanced to prevent undervaluation or tax evasion.
As regards other taxes relating to registration and the transfer of title in the land registry, established practice and the case law of the Court of Cassation set out the following rules for calculation:
- mortgage tax: this is levied once only on the value of the property that gives rise to the highest registration tax, as there is only one registration requirement for the entire transaction;
- cadastral tax: for property exchanges subject to proportional registration following the 2014 reform, the Italian Revenue Agency has clarified that the cadastral tax is payable only once, at a fixed rate of 50 euros;
- exchange costs and notary fees: pursuant to Article 1554 of the Civil Code, unless otherwise agreed in the contract, the costs of the exchange and any ancillary costs are to be borne equally by both contracting parties, thereby deviating from the rule applicable to sales, under which such costs are borne entirely by the purchaser; with regard to the notary, for the finalisation of the exchange deed, the parties remain jointly and severally liable for the full amount.
Risks, legal safeguards and differences between a trade-in and a traditional sale
Article 1555 of the Civil Code provides that the rules governing sale shall apply to a exchange contract, insofar as they are compatible. Each party to the contract is therefore required to provide a warranty against hidden defects which render the subject matter of the exchange unfit for use or diminish its value.
A specific and very strong form of protection relates to eviction, which occurs if a party to a barter agreement loses ownership of the property received due to claims made by a third party. The evicted party may choose either to claim the value of the lost property or to demand the return of the property originally transferred, subject to compensation for damages. This possibility of regaining the original property fundamentally distinguishes the legal nature of a barter contract from that of a traditional sale. There are also rare scenarios involving the exchange of another person’s property, which constitute a compulsory barter in which the real legal effects only take place once the contracting party acquires ownership of the property from the third-party owner.
The existence of a mortgage does not prevent the exchange transaction from going ahead, but it does require specific financial planning to be agreed upon before the deed of sale is signed:
- early repayment: the seller repays the mortgage before the deed of sale or at the same time as it is signed, using their own funds or the sum received as a settlement;
- Refinancing: the contracting parties shall terminate the existing credit agreements in order to arrange new credit facilities based on the new capital structure.
- Refinancing: the contracting parties shall terminate the existing credit agreements in order to arrange new credit facilities based on the new capital structure.
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FAQ – Property exchange agreements and property swaps
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What is the role of the notary in a property exchange agreement?
In a property exchange, the notary plays a particularly important role, as they must carry out checks on mortgages, land registry entries and planning regulations relating to the properties involved in the exchange, in order to verify ownership, compliance with the law and the existence of any encumbrances, restrictions or prejudicial formalities.
The notary also ensures that the transaction is correctly structured for tax purposes, taking into account the specific rules governing barter transactions and the possible applicability of tax relief. They guarantee the legality of the public deed and carry out the subsequent formalities – including registration, entry in the land registers and the transfer of ownership in the cadastral register – necessary to make the transfers of ownership resulting from the barter transaction enforceable against third parties.
Is it possible to arrange a transfer between a private individual and a company?
Yes, a property exchange is fully valid even when one of the parties is a VAT-registered entity, such as a construction company. In this situation, the tax treatment becomes more complex, as the supply made by the company will be subject to VAT, calculated on the open market value of the property, whilst the transfer carried out by the private individual will be subject to proportional registration duty on the value of the property, which is not subject to VAT.
Is it possible to exchange properties if one of them is subject to building violations that cannot be rectified?
No, the existence of serious and irremediable planning infringements prevents the deed from being signed, just as is the case in a traditional sale. The notary is obliged to include in the deed the planning declarations and cadastral compliance certificates for both properties involved; the absence of these requirements or the presence of substantial discrepancies renders the deed null and void. Therefore, before proceeding with the exchange, it is essential that each owner rectifies any planning irregularities relating to their own property.
How does a part-exchange work in the case of a jointly owned or co-owned property?
The transaction is perfectly feasible, but requires the consent and signature of all the joint owners of the assets involved. If, for example, a married couple jointly own a property and wish to exchange it for a property owned solely by a third party, both spouses must be present at the notarial deed to transfer their shares and to determine whether the new property received in exchange will be held in joint ownership or remain in the name of only one of them, whilst settling any financial adjustment.
Is a property exchange subject to capital gains tax?
Yes, for the purposes of capital gains tax, a property exchange is treated in the same way as a normal sale. If one of the parties to the exchange disposes of a property purchased (or received as a gift) less than five years previously, and that property has not been used as their main residence for the majority of that period, any positive difference between the value attributed to the property at the time of the exchange and the original purchase price constitutes a taxable capital gain, subject to a substitute tax or ordinary IRPEF taxation.
Does it make sense to carry out a exchange between a Third Sector Organisation (ETS) and a private individual or a company?
Yes, the transaction may prove strategic in terms of optimising the organisation’s property portfolio. A Third Sector Organisation may transfer a property that is no longer suitable for its institutional activities (such as an old building in need of renovation) to a private individual or a company, receiving in exchange properties suitable for its charitable purposes (such as offices, operational premises or supported accommodation). In such cases, the notarial deed must take into account the organisation’s specific statutory restrictions, the prohibition on making a profit, and the special tax relief provided for in the Third Sector Code for the transfer of immovable property, requiring a very rigorous prior review of the contractual terms.
How are the bank’s involvement and the mortgage approval handled in a property exchange?
The bank’s involvement requires a coordinated timeline, particularly if the parties intend to proceed with the assumption of the existing mortgage or with its repayment at the time of the conveyance. Credit institutions must approve the loans on the basis of valuations of both properties. If a cash adjustment is required, the bank of the party giving up their property – who receives the property of lower value – may grant a mortgage to cover the difference in cash, provided that the mortgage is correctly registered on the newly acquired property during the single notarial procedure.
How does the timeframe for organising a property exchange compare to that of a standard sale?
The time taken to prepare the documentation is slightly longer, as the notary’s due diligence must cover two separate properties. However, the overall transition time is reduced to zero compared with the sequence of sale followed by purchase: the exchange of the house takes place at the very same moment, eliminating the months of waiting that usually elapse between the completion of the sale of the old house and the purchase of the new one. This saves the parties from having to resort to temporary tenancy agreements or interim security deposits.
What happens if it turns out that the trade-in is significantly unbalanced in terms of value?
If the economic imbalance between the two properties already existed at the time the contract was concluded and was due to one party’s state of need, from which the other party took advantage, the general action for rescission on the grounds of unfair advantage may, in theory, be brought, provided that the conditions laid down by law are met, including a disparity in value exceeding half.
If, however, the imbalance between the performances arises at a later date, as a result of extraordinary and unforeseeable events, the aggrieved party may, in the cases provided for by law and where the contract has not yet run its course, seek termination on the grounds of supervening excessive burden.
In what circumstances is a property exchange between private individuals not a good idea?
The main disadvantage is of a practical nature and lies in the difficulty of finding a counterparty who owns a property that meets one’s needs and who, at the same time, is interested in acquiring the house offered in exchange. Furthermore, the presence of complex mortgages or the need to calculate very high adjustments can make the financial management of the transaction rather complex, suggesting in some cases that a traditional sale and purchase transaction be used instead.