What is a Sale or Exchange?

A sale or exchange is a legal term that is used to refer to some sort of transaction involving a voluntary exchange of property. A transaction of this type is different from a contribution, inheritance of a gift, in that a sale or exchange requires that both the buyer and the seller receive some type of value from the transaction. In most cases, this transaction results in the creation of some sort of gain or loss that must be accounted for in the tax records.

It is this generation of some type of taxable gain or loss that distinguishes the sale or exchange from other types of financial transactions. In situations in which the value-for-value exchange generates a gain for one of the parties, there is a good chance that at least some taxes will be owed. Depending on the type of asset involved, it may be possible to defer a portion of the tax for future periods, or even to defer a portion of the gains permanently. Since tax laws vary from one jurisdiction to another, the process for assessing any gains or losses created by a sale or exchange will differ, making it necessary to consult current laws when preparing tax returns.

Unlike transactions that involve gifts or inheritances, a sale or exchange requires that both parties obtain some type of value from the deal. The range of value does not have to mean that both parties gain in some manner. For example, if a homeowner chooses to sell the property for less than the equity in the home, the real estate is sold at a loss even though the owner does still receive some compensation from the sale. At the same time, the buyer who is able to purchase the home below the current market value posts a considerable gain that may be taxable, depending on local tax laws and the particulars of the sale.

There are sometimes situations in which a sale or exchange approach is used, and there is no tax burden created by the transaction. For example, if two homeowners choose to conduct an even swap on a couple of properties, there is a chance that no additional taxes will be due, even if the two properties in question do not have the same value. This is particularly true if the applicable tax laws allow the party who experiences a gain from the sale or exchange to claim a certain amount of exclusion. Should the amount of the gain be less than the exclusion currently allowed, then there are no additional taxes due as the result of the exchange of properties.