An improvement exchange — also called a construction or build-to-suit exchange — lets you apply 1031 funds toward improvements on replacement property you do not yet own outright. This step-by-step guide explains the parking structure, the 180-day limit on completing improvements, and how to capture improvement value as part of like-kind property.
General information only — not tax, legal, or financial advice. A 1031 exchange has strict, unforgiving deadlines and significant tax consequences. Work with a CPA and a qualified intermediary (QI) before you act. A REALTOR® cannot serve as your QI. Verify current IRS and California FTB rules with a licensed tax professional.
When an improvement exchange helps
Sometimes the replacement property alone is worth less than what you sold, or you want to build value into raw land or a fixer. An improvement exchange lets you direct exchange dollars into construction or renovation so the improved property's value matches or exceeds your relinquished property — helping you fully defer gain and avoid boot.
The step-by-step process
- Engage a qualified intermediary and an exchange accommodation titleholder (EAT) before closing.
- The EAT acquires and holds title to the replacement property.
- Within 45 days, identify the replacement property — including a description of the planned improvements.
- Exchange funds (and any financing) are used to build or renovate while the EAT holds title.
- Improvements must be physically completed enough to count toward value before day 180.
- On or before day 180, the EAT transfers the improved property to you to complete the exchange.
- The QI reconciles funds and the exchange closes.
The 180-day construction limit
This is the binding constraint. Only improvements actually completed and attached to the real property within 180 days count toward the value you receive. Money set aside for future, unfinished work does not count as like-kind property — it can be treated as taxable boot.
Build a realistic construction schedule. If the work cannot be substantially completed inside 180 days, the uncompleted portion will not count toward your exchange value.
What counts as a qualifying improvement
- Real-property improvements: structures, additions, permanent fixtures, site work.
- Improvements must be in place and part of the real property you receive.
- Materials sitting unused or work not yet performed generally do not count.
- Personal property and services not affixed to the real estate are typically excluded.
Avoiding boot in an improvement exchange
To fully defer gain, the value you receive (land plus completed improvements) generally must equal or exceed your relinquished property's value, and you must reinvest all net equity. Shortfalls — including funds left unspent on incomplete construction — can create taxable boot. Coordinate the budget and timeline with your CPA.
How Brian helps
Brian helps you find replacement property with real upside — land or a value-add building — and coordinates contractors, permits, and escrow milestones so improvements progress fast enough to count inside 180 days, working alongside your QI and EAT.
Frequently Asked Questions
What is an improvement 1031 exchange?
Also called a construction or build-to-suit exchange, it lets you use 1031 funds to build or renovate replacement property held by an exchange accommodation titleholder, so the improved value counts as like-kind.
Do improvements have to be finished within 180 days?
Yes. Only improvements completed and attached to the real property within the 180-day window count toward your exchange value. Unfinished work can become taxable boot.
Can I prepay for future construction?
No. Funds set aside for work not yet performed within 180 days generally do not count as like-kind property and may be treated as boot.
Who holds title during construction?
An exchange accommodation titleholder (EAT) holds title while improvements are made, then transfers the finished property to you before day 180.
What improvements qualify?
Real-property improvements that are physically in place — structures, additions, permanent fixtures, and site work. Loose materials and unperformed services usually do not qualify.
Is this tax advice?
No. This is general educational information. Improvement exchanges are complex — work with a CPA, attorney, and qualified intermediary.
