Improvement Exchange
An improvement exchange lets a 1031 investor use exchange funds to build or renovate the replacement property before taking title, counting the work toward value.
Definition
An improvement exchange, also called a construction or build-to-suit exchange, lets a 1031 investor apply exchange proceeds toward improvements on the replacement property. It is useful when the replacement costs less than the relinquished property, since the added construction value can help the investor trade equal or up and avoid boot.
Because an investor cannot build on property they already own with exchange funds, an exchange accommodation titleholder (EAT) takes and holds title while improvements are made, using the safe harbor of Revenue Procedure 2000-37. All work must be completed and the property transferred to the investor within the standard 180-day window.
For example, an investor selling a $2 million property could buy a $1.5 million building and use $500,000 of exchange funds for renovations, reaching the $2 million target. The tight deadline and added complexity make improvement exchanges more demanding than a standard exchange.
Key points
- Uses exchange funds to improve the replacement property
- An exchange accommodation titleholder holds title during construction
- Improvements must be completed within the 180-day period
- Helps trade equal-or-up when the replacement costs less
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.