Build-to-Suit 1031 Exchange
Improvement Exchanges
Use your exchange proceeds to acquire land and construct a purpose-built replacement property — maximizing your reinvestment and deferring 100% of your capital gains taxes.
What Is an Improvement Exchange?
An improvement exchange — also known as a build-to-suit or construction exchange — is a specialized type of 1031 exchange that allows you to use the proceeds from the sale of your investment property to acquire land and construct improvements on it, or to purchase a property and make renovations that bring it up to the required value.
In a standard 1031 exchange, you must find a replacement property of equal or greater value. But in many markets, suitable properties are hard to find — or none match your investment goals. An improvement exchange solves this problem by letting you build the replacement property, using exchange funds to pay for both the land and the construction.
Because IRS rules prohibit you from directly receiving or touching exchange funds, an Exchange Accommodation Titleholder (EAT) holds title to the property during construction. Once the improvements are complete and the property meets the value requirement, the EAT transfers title to you — completing the exchange with full tax deferral.
How an Improvement Exchange Works
The improvement exchange process follows the same 45-day and 180-day deadlines as a standard exchange, but adds a construction phase managed through a parking arrangement with an Exchange Accommodation Titleholder.
Identify & Plan
Before closing on your relinquished property, identify the replacement property (raw land or a property needing improvements) and develop a construction plan with timelines and budgets.
Parking Arrangement
An Exchange Accommodation Titleholder (EAT) — a special-purpose entity set up by your Qualified Intermediary — takes title to the replacement property. This "parking" arrangement is required because you cannot touch the exchange funds.
Sell Relinquished Property
Your relinquished property closes. The net proceeds are held by the QI in a dedicated FDIC-insured account. The 45-day identification clock and 180-day exchange clock begin simultaneously.
Fund Construction
Exchange funds are released to the EAT (or to contractors through the EAT) to pay for the land acquisition and/or construction improvements on the replacement property.
Complete Improvements
All construction must be completed — and the property must reach the required fair market value — within the 180-day exchange period. The EAT holds title throughout construction.
Transfer Title
Once improvements are complete and the value requirement is met, the EAT transfers title to you. The exchange is complete and all capital gains taxes are deferred.
Improvement Exchange Requirements
To qualify for full tax deferral, an improvement exchange must satisfy all of the following requirements under IRS Section 1031 and Revenue Procedure 2000-37:
- The replacement property — after improvements — must be of equal or greater value than the relinquished property
- All net equity from the sale must be reinvested into the replacement property or its improvements
- Construction improvements must be completed within the 180-day exchange period
- Title to the replacement property must be held by the Exchange Accommodation Titleholder (EAT) during construction
- The property must be held for investment or business use — personal use is disqualifying
- You must identify the replacement property within 45 days of closing on the relinquished property
- The replacement property must be "like-kind" — any real property held for investment or business use qualifies
Key Deadlines
Identification Period
From the date your relinquished property closes, you have 45 calendar days to formally identify the replacement property (land or property to be improved) in writing to your Qualified Intermediary.
Exchange Period
All construction improvements must be completed, the property must reach the required fair market value, and title must be transferred to you — all within 180 calendar days of closing on your relinquished property.
Critical: The 180-day deadline is absolute — there are no extensions, even for construction delays caused by weather, permitting, or contractor issues. This is why a realistic construction timeline and experienced team are essential before starting an improvement exchange.
When to Choose an Improvement Exchange
Improvement exchanges are ideal for investors who want maximum control over their replacement property and have a project that can realistically be completed within 180 days.
Build to Your Specifications
Acquire raw land and construct a purpose-built property that meets your exact investment goals, rather than settling for an existing property.
Use Exchange Funds for Construction
Exchange proceeds can fund both the land purchase and the construction costs, maximizing the capital working for you.
Full Tax Deferral
When structured correctly, the entire gain — including the value of improvements — is deferred, just like a standard 1031 exchange.
Solve Replacement Property Scarcity
In tight markets where suitable replacement properties are hard to find, building your own creates options that wouldn't otherwise exist.
Improvement Exchange FAQs
What is an improvement exchange?
An improvement exchange — also called a build-to-suit or construction exchange — is a type of 1031 exchange that allows you to use exchange proceeds to acquire land and construct improvements, or to buy a property and make improvements to it, before taking title. The Exchange Accommodation Titleholder (EAT) holds the property during construction, then transfers it to you once the work is complete and the value requirement is met.
How is an improvement exchange different from a standard 1031 exchange?
In a standard deferred exchange, you simply sell one investment property and buy another of equal or greater value. In an improvement exchange, the replacement property may not yet be worth enough on its own — you use exchange funds to build improvements that bring it up to the required value. The EAT holds title during this construction period because IRS rules prohibit you from receiving or touching the exchange funds directly.
What are the deadlines for an improvement exchange?
The same 45-day and 180-day deadlines apply. You must identify the replacement property within 45 days of closing on your relinquished property, and all construction improvements must be complete — and title transferred to you — within 180 days. Because construction must be finished within this window, careful planning and a realistic construction schedule are essential.
Can I use exchange funds to pay for construction costs?
Yes. Exchange proceeds can be used to purchase the land and fund construction improvements. The funds are disbursed through the EAT to pay contractors, suppliers, and other construction costs. This allows you to put the full proceeds of your sale to work — not just the amount needed to buy an existing property.
What happens if construction is not completed within 180 days?
If the improvements are not complete by the 180-day deadline, the exchange fails and the transaction is treated as a taxable sale. You would owe capital gains taxes on the relinquished property. This is why it is critical to work with experienced contractors and a qualified intermediary who understands improvement exchanges before committing to this structure.
Who holds title to the property during construction?
The Exchange Accommodation Titleholder (EAT) — a special-purpose entity established by your Qualified Intermediary — holds legal title to the replacement property during the construction period. You hold an equitable interest. Once construction is complete and the value requirement is satisfied, the EAT transfers title to you, completing the exchange.
How much does an improvement exchange cost?
Improvement exchanges are more complex than standard exchanges and typically carry higher fees due to the EAT arrangement, additional documentation, and ongoing coordination with contractors. Pricing is determined on a case-by-case basis. Contact us for a free consultation and quote tailored to your specific project.
Planning an Improvement Exchange?
Improvement exchanges are complex and time-sensitive. Our attorney-led team has the experience to structure your build-to-suit exchange correctly — from EAT setup to construction coordination and final title transfer.