Improvement (Construction) 1031 Exchanges

1031 Exchange · Baker 1031 Research · Updated June 2026 · 14 min read

I keep seeing the same hard problem in exchange planning: the available replacement is useful, but it is not worth enough as it stands. Sometimes the suitable property has not been built yet. An improvement exchange can put exchange proceeds to work building or renovating the replacement, but only work completed and paid for within a tight 180-day period counts.

First-order thinking says that construction adds value. Second-order thinking asks whether the right value can be acquired, built, documented, and paid for before the clock expires. The tax structure rewards that discipline; it does not forgive an unfinished scope.

What Is an Improvement Exchange?

An improvement exchange, also called a construction or build-to-suit exchange, applies exchange proceeds to improvements on a replacement property. The completed improvements count toward the equal-or-greater-value requirement. An exchange accommodation titleholder (EAT) takes title to the replacement while the work is done, and the investor completes the exchange.

In a standard exchange, the investor buys the replacement as-is. Here, exchange funds build value into it, either to reach the needed value or to create a property for a particular specification. Like a reverse exchange, the structure uses the parking safe harbor in Rev. Proc. 2000-37: the EAT holds title while improvements are made during the 180-day window.

Why Use an Improvement Exchange

There are two central reasons: value and customization. If the available replacement is below the sale price of the relinquished property, completed improvements can close the gap and avoid boot. A build-to-suit structure can also create a replacement for a particular use or tenant.

Consider an illustrative sale for $1,000,000. If the best replacement costs $800,000 as-is, $200,000 of completed improvements can bring the credited value to $1,000,000, allowing full deferral. Without the structure, the $200,000 difference is taxable cash boot or requires a more expensive replacement.

How Construction Funds Are Held

The EAT holds title. The qualified intermediary holds and disburses exchange funds for construction or renovation as work is completed. The investor directs the improvements, but does not control the parked title or the funds.

Funds are released against finished, paid-for work. Pre-funding the entire construction budget does not make it count. Work in progress, materials sitting on site, and work completed or paid after the exchange period do not add to replacement value. The EAT-and-QI arrangement keeps the funds and title within the exchange framework and is intended to follow the parking safe harbor.

The 180-Day Constraint

The acquisition and all value-adding work must be completed within 180 days of the relinquished sale, and the EAT may park the property for no more than 180 days under the safe harbor. This is the defining constraint.

Construction rarely follows a calendar perfectly. Permits, weather, contractor availability, supply delays, cost overruns, and financing can all interfere. If a piece of work is not finished and paid for by day 180, it does not count; the resulting value shortfall can become taxable boot.

That is why the scope needs to be conservative. Target completion around day 150, line up a contractor before the exchange begins, use a clear scope and fixed timetable, and, where workable, include delay penalties. Confirm permits, material availability, and long-lead or weather risks. Renovating a functional property is often more achievable in the window than ground-up construction.

What Counts Toward Value

For the equal-or-greater-value test, the acquisition cost and only those improvements actually completed and paid for during the 180-day window count. The QI and CPA should track completion and payment evidence. Build a buffer rather than aiming at the final day.

The practical point is plain: an improvement exchange uses exchange funds to build or renovate a replacement within 180 days; an EAT holds title and the QI funds only completed, paid-for work; construction risk is acute. Reliable contractors and a realistic scope are not administrative details. They determine whether the intended deferral is achieved.

Build-to-Suit Exchanges

A build-to-suit exchange is an improvement exchange used to construct a property, or substantial improvements, to the investor's specifications. The investor can acquire land or a property and build the desired replacement instead of accepting an existing asset.

It can suit a specific use or tenant. It is also the most time-constrained form because new construction is harder to complete in 180 days than a renovation. The feasibility question comes first: can the project truly be completed and paid for in time? If not, another structure may be needed.

Can You Improve Property You Already Own?

Generally, no. A 1031 exchange is for replacement property being acquired, not property the investor already owns. The standard improvement exchange has the EAT acquire and hold a new replacement while it is improved.

Related-party or leasehold approaches aimed at adjacent or related owned property have been attempted, but they are aggressive, fact-specific, and risky. Improving owned property is generally not a 1031 use case. Any creative proposal requires experienced tax counsel.

Common Use Cases and Reverse-Improvement Combinations

The usual use case is a less-expensive replacement where improvements bridge the equal-or-greater-value gap. Others include acquiring and renovating an underimproved property, a build-to-suit project for a particular tenant or use, or making a property functional or leasable.

A reverse-improvement exchange is used when the replacement must be acquired before the relinquished property is sold and it also needs improvement. The EAT parks the replacement, the improvements are funded, and the relinquished property is sold within the structure. This combines the parking and financing challenges of a reverse exchange with the construction deadline. It solves a narrow problem and is the most complicated form of 1031 exchange, with corresponding cost and execution risk.

Costs, Requirements, and Financing

An improvement exchange costs more than a standard delayed forward exchange. Beyond construction cost, it can require forming and operating the EAT, legal and documentation work, QI-controlled construction disbursements, contractor coordination, project management, and, in some cases, a lender able to work while the EAT holds title.

Financing has two parts: purchasing the replacement and paying for improvements. Exchange proceeds usually fund the acquisition and are disbursed against completed work, but the cash-flow timing must work. If the construction budget is above available exchange proceeds, additional cash or financing may be necessary. A construction loan on the parked property can fund the gap, but must fit the EAT structure. A funding shortfall leaves work unfinished or uncounted just as a deadline overrun does.

Before committing, confirm that proceeds plus additional financing can acquire and improve the property to the target value in 180 days. The team should include an improvement-exchange QI familiar with EATs, reliable contractors, the CPA, and an advisor able to compare alternatives. An experienced lender matters where a loan is needed.

A Worked Improvement Example

Suppose an investor sells for $1,000,000 and identifies a $750,000 property that needs $250,000 of renovations to be fully leasable and reach the target value. The EAT acquires the $750,000 property, and the QI disburses $250,000 for renovations.

If the work is completed and paid over the next four months, within the 180-day period, the property has $1,000,000 of value and exchange credit. Title transfers from the EAT to the investor with full deferral and no boot. If $50,000 of work remains incomplete at day 180, that $50,000 does not count and becomes a taxable shortfall. These figures are illustrative.

Improvement Exchanges and Value-Add Investing

This structure fits value-add investors who buy underimproved property and raise value through renovation. It lets the investor begin value creation with exchange funds while deferring gain. The early phase of the plan, however, must fit the 180-day window. A larger project may continue after the exchange, but later work is outside the 1031 structure and does not count toward replacement value.

For a sponsor or owner with dependable construction capabilities, the exchange can align the tax structure with an active investment plan. For a project dependent on a long build schedule, the same feature becomes a risk. The question is not whether the project will eventually be good; it is whether the credited work will be complete and paid in time.

Is an Improvement Exchange Right for You?

It can fit when a suitable replacement is worth less than the relinquished property and completed improvements can bridge the gap, or when a custom build-to-suit replacement is essential. It is usually a poor fit for ambitious construction that cannot finish in 180 days, for improving property already owned, or when a fully priced replacement or a DST would meet the same need more simply.

Frequently Asked Questions

What is an improvement 1031 exchange?

It uses exchange proceeds to build or renovate a replacement property so completed improvements count toward equal-or-greater value. An EAT holds title, the QI disburses funds, and the counted work must be completed and paid within 180 days.

Why would I use one, and how does it avoid boot?

It can close the value gap between a cheaper replacement and the relinquished sale, or create a custom build-to-suit property. Completed improvements add credited value; without them, the gap can be taxable boot.

Must improvements be finished in 180 days, and what counts?

Yes. The acquisition cost plus improvements completed and paid by day 180 count. Work in progress, uninstalled materials, and later work do not. Later improvements may be completed outside the exchange, but do not count toward the exchange value.

How are construction funds held?

The EAT takes title and the QI disburses exchange funds against completed, paid-for work. The full budget cannot simply be pre-funded and counted.

What is a build-to-suit exchange? Is it suitable for new construction?

It is an improvement exchange used to build a property or substantial improvements to the investor's specifications. It is useful for a custom replacement, but new construction is harder to finish in 180 days than renovation. Confirm feasibility before committing.

May exchange funds improve property I already own?

Generally no. The replacement must be newly acquired. Aggressive structures involving related or adjacent property are risky and need tax counsel.

What is the greatest risk, and what happens after day 180?

Timing. Permits, weather, contractors, and supplies can delay completion. Unfinished or unpaid work does not count and can create taxable boot. Conservative scoping, dependable contractors, and a completion target around day 150 create buffer.

Can a reverse and improvement exchange be combined?

Yes. A reverse-improvement exchange acquires the replacement before the sale through an EAT and improves it with exchange funds. It combines parking, financing, and construction challenges and requires experienced professionals.

How much do these exchanges cost, and are they worth it?

They cost more than a forward exchange because of the EAT, legal and documentation work, controlled disbursements, project management, and construction. They can be worth the added cost and risk when building value into a specific replacement is genuinely necessary; a fully priced replacement or a DST may be simpler when either meets the objective.

What if the construction budget is larger than exchange funds? Do I need a loan?

Additional cash or financing is needed for work that exceeds proceeds. A construction loan can sometimes fund the gap, but the lender must accommodate EAT title. Smaller projects may be fully funded by exchange proceeds.

Are improvement exchanges useful for value-add investors?

Yes, if meaningful early renovations can be completed and paid in the window. Later improvements may proceed after the exchange, but they are outside the 1031 structure and do not add exchange value.

Who should be on the team?

Use an EAT-experienced QI, reliable contractors, the CPA, an advisor, and, when needed, a lender familiar with parked-property financing.

Glossary

• Improvement Exchange: A 1031 exchange using proceeds to build or renovate replacement property within 180 days.
• Build-to-Suit Exchange: An improvement exchange used to construct property to the investor's specifications.
• Exchange Accommodation Titleholder (EAT): The entity holding replacement title while improvements are made.
• Rev. Proc. 2000-37: The IRS safe harbor for parking structures used in reverse and improvement exchanges.
• Equal-or-Greater-Value Rule: The requirement to acquire at least the relinquished property's value for full deferral.
• Boot: Taxable value received, including uncredited replacement value.
• 180-Day Window: The period for acquisition and all counted improvements.
• Construction Disbursement: QI release of exchange funds for completed, paid-for work.
• Reverse-Improvement Exchange: A reverse exchange combined with construction on the replacement.
• Parked Property: Replacement property held by the EAT during improvement.
• Qualified Intermediary (QI): The party holding exchange funds and disbursing them for construction.
• Value-Add: Improving an underimproved property to increase value.

Sources & References

• IRS, Like-Kind Exchanges — safe harbors.
• IPX1031, Improvement (construction) exchanges.
• Accruit, Improvement and reverse exchange basics.
• JTC Group, 1031 and Real Estate: Answers to Common Questions.

Disclosures

This article is published by Baker 1031 Investments, LLC for general educational purposes for accredited investors and is not an offer to sell or a solicitation of an offer to buy any security, nor is it tax, legal, accounting, or investment advice or a recommendation. Any securities offering is made solely through a sponsor’s private placement memorandum (PPM) following a suitability determination. Securities offered through Aurora Securities, Inc. (ASI), member FINRA / SIPC; Baker 1031 Investments is independent of ASI.

Oil & gas mineral and royalty interests and DST programs are speculative, illiquid securities sold only to verified accredited investors and involve substantial risk, including possible loss of principal, commodity-price and production-decline risk, lack of control, and the risk that an intended 1031 exchange fails to qualify for tax deferral. Whether a particular interest qualifies as like-kind real property is a fact-specific legal determination that varies by state and by the terms of the instrument. Tax results depend on your individual circumstances. Consult your own CPA and attorney before acting. Past performance does not guarantee future results.

Source notes

Filed under: 1031 Exchange; 1031 Exchange.

About the author: Jerry Baker, Founder & Managing Principal, Baker 1031 Investments · FINRA Series 22 / 63 · SIE. Jerry founded Baker 1031 to bring institutional underwriting discipline to the 1031 exchange. He spent more than a decade on Wall Street working on $10B+ of real estate before building diversified DST portfolios for individual investors. Read full bio →

Reviewed by Lori Kamen, President & CCO, Aurora Securities, Inc. (FINRA Series 4 / 7 / 24 / 53 / 63 / 66), the supervising registered principal. Last reviewed June 2026. Baker 1031 reviews its educational content periodically for accuracy and regulatory compliance. Securities offered through Aurora Securities, member FINRA/SIPC.

Explore current offerings. See the 1031 Exchanges available and how they may fit a strategy like this one: View 1031 Exchanges →. Educational only — not an offer of any security. Offerings are available to verified, accredited investors and change over time.

For capital I am managing now, I would fund only a scope that has room for timing, funding, and documentation surprises, not a plan that requires day 180 to go perfectly. How are you weighing a custom replacement against the certainty and simplicity of an existing one?