An improvement 1031 exchange, also called a construction or build-to-suit exchange, is a type of 1031 exchange in which the investor uses exchange proceeds to fund improvements on the replacement property before taking title. The IRS requires that all improvements be substantially completed within the 180-day exchange window and that an Exchange Accommodation Titleholder (EAT) hold title to the replacement property during construction.
The Problem It Solves
In a standard exchange, you must acquire a replacement property of equal or greater value to defer all taxes. If your replacement property is worth less, the difference (called 'boot') is taxable. An improvement exchange lets you use the remaining proceeds to fund construction, bringing the total value up to the required threshold.
- Defer taxes even when the replacement property costs less than the relinquished property
- Use exchange proceeds to fund construction or renovation
- Develop raw land into a higher-value investment
- Upgrade an existing building to increase its value
How It Works
The EAT takes title to the replacement property and manages the construction process during the exchange period. All improvements must be substantially completed within the 180-day exchange window. The property is then transferred to you with the improvements in place.
- EAT holds title during the construction period
- Construction must be substantially complete within 180 days
- Proceeds fund improvements through a construction escrow
- Property transfers to you with completed improvements
Frequently Asked Questions
An improvement 1031 exchange, also called a construction or build-to-suit exchange, allows the investor to use exchange proceeds to fund improvements on the replacement property before taking title. All improvements must be substantially completed within the 180-day exchange window.