Improvement exchanges

Most 1031 exchanges swap one existing property for another. An improvement exchange, also called a build-to-suit or construction exchange, does something more ambitious: it lets you use your exchange proceeds to improve or build on the replacement property before you take title, so the value of that new construction counts toward your exchange. It solves two problems, a replacement property that is not worth enough to fully defer your gain, and a bare parcel you want to develop, and it does both against a punishing 180-day deadline.

The problem it solves

To fully defer your gain, you generally have to buy a replacement of equal or greater value. But what if the property you want costs less than what you sold, or is raw land you intend to build on. Buy it as-is, and you have leftover proceeds that become taxable boot, or a parcel whose bare-land value falls short of your target.

An improvement exchange fixes this by letting you spend exchange funds on construction and improvements to the replacement, and count that added value toward the equal-or-greater-value requirement. You sell a $1,000,000 property, buy a $600,000 parcel, and use $400,000 of exchange funds to build on it, and the finished $1,000,000 property fully absorbs your proceeds. The improvements become part of the replacement value.

An improvement exchange lets you spend exchange funds building on or renovating the replacement property, so new construction counts toward the value you need to fully defer your gain.

How it works: the EAT holds title while you build

Here is the structural wrinkle. You cannot improve property you already own with exchange funds and have it count, you can only exchange into value that exists at the time you take title. So, as with a reverse exchange, a third party holds the property while the work happens.

An exchange accommodation titleholder, the EAT, takes title to the replacement property and holds it during construction, under the same Revenue Procedure 2000-37 safe harbor that governs reverse exchanges. Exchange funds pay for the improvements while the EAT holds title. When the work is far enough along, the improved property is transferred to you to complete the exchange. Because the EAT owns it during the build, the improvements are made to property you do not yet own, which is what lets their value count toward your exchange.

Because you cannot count improvements to property you already own, an exchange accommodation titleholder holds title and the improvements are built while it owns the property.

The 180-day guillotine

This is the constraint that makes improvement exchanges hard, and it is absolute: only improvements actually completed and part of the real property before the end of the 180-day exchange period count toward your replacement value. Whatever is not finished by day 180 does not count, no matter how much you have paid for it.

Construction runs late. Permits stall, weather intervenes, contractors slip. If your building is only 70% complete on day 180, only that 70% of value counts toward your exchange, and the shortfall becomes taxable boot. This turns an improvement exchange into a race against a fixed deadline, and it is why they demand realistic construction timelines, contractors who understand the stakes, and a heavy focus on getting completed, attached improvements in the ground fast rather than finishing every detail. Site work and vertical construction that becomes part of the real property counts; a pile of materials not yet installed does not.

Only improvements completed and attached to the property by day 180 count toward your exchange value, so anything unfinished at the deadline becomes taxable boot.

The bottom line

• An improvement exchange lets exchange funds pay for construction on the replacement property.
• The added value counts toward the equal-or-greater-value requirement to fully defer gain.
• An exchange accommodation titleholder holds title while the improvements are built.
• Only improvements completed and attached by day 180 count; the rest becomes taxable boot.
• Construction risk against a fixed deadline makes realistic scheduling essential.

For the parking structure it shares, read reverse exchanges. For the value shortfall it prevents, see boot. For the full picture, start at the 1031 exchanges and exit planning hub.

Last verified August 2026.