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What is Part Exchange?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 30 October 2016
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    Conjecture Corporation
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Sometimes known as a part exchange deal, a part exchange is a type of contractual agreement that requires both parties to supply goods and services to the other, although some variations allow for one party to also provide some type of cash payment along with the goods and services. This is different from many other types of transactions in which one party supplies specific products in exchange for some type of monetary compensation. While in some areas of the world, a part exchange is considered to be a form of bartering, laws within different nations draw a distinction between the two terms, identifying specific attributes that separate the legal definitions of the two types of transactions.

There are several benefits to a part exchange. Depending on the nature of the goods and services involved in the transaction, both parties may be able to secure products they find highly desirable without incurring the expense that would be necessary as part of a more traditional cash transaction. When this is the case, both parties find that the use of a part exchange has a positive impact on their operating expenses, which in turn has the ability to divert more of the profits from sales toward business expansion rather than settling the operational debt.

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The key to a successful part exchange requires that both parties receive satisfaction from what they receive as a result of the deal. At times, this may be somewhat difficult to achieve, making it necessary to negotiate both the type and the volume of the goods and services that both parties are willing to commit to the transaction. In some cases, one party may settle for a combination of products and a fixed amount of cash, while the other party is happy with receiving a specified range of goods and services.

While reasons vary, there is sometimes a legal distinction between a part exchange and a barter. Typically, the issue of what type of monetary value is assigned to the products that are traded as part of the exchange. For example, if two parties choose to trade cars as an even swap and do not assign a monetary value to either vehicle, the trade is likely to be considered a barter. Should the two parties choose to assign a specific monetary value to each car, and one party also adds in a cash amount as part of the trade, this would more likely be classed as a part exchange. The distinction is important in many nations, since the proper classification of the transaction may impact whether or not taxes are assessed, and if so how much tax is due to local or national tax agencies.

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