An Improvement 1031 Exchange, also known as a Build-to-Suit (BTS) or Construction 1031 Exchange, allows investors to use Section 1031 proceeds to renovate, construct, or enhance Replacement Property within the exchange period. When properly structured, it becomes a strategic tool for asset value creation and tax deferral planning.
TL;DR: Improvement Exchanges allow 1031 funds to be used for building or improving Replacement Property. They’re more complex and costly but offer flexibility with Forward or Reverse options.
Importantly, a Build-to-Suit Exchange can be structured as either a Forward (Delayed) Improvement Exchange or a Reverse Improvement Exchange, depending on timing and acquisition strategy.
What Is an Improvement (Build-to-Suit) 1031 Exchange?
An Improvement 1031 Exchange is a specialized 1031 Exchange structure that allows a taxpayer to use proceeds from the sale of Relinquished Property to construct, renovate, or enhance the Replacement Property during the exchange period.
Unlike a traditional Delayed 1031 Exchange where a completed property is acquired, this structure allows improvements to be made during the 180-day exchange period. The value of improvements completed within that period is included in the Replacement Property value for Section 1031 purposes.
This may include:
- Renovating an underperforming asset
- Completing tenant improvements
- Redeveloping an existing structure
- Constructing new improvements on newly acquired land
- Customizing property for a long-term tenant
To qualify for full tax deferral under Section 1031, the improvements must be completed within the 180-day exchange period and properly structured in compliance with IRS guidelines. Learn more about Improvement 1031 Exchange steps.
Strategic 1031 Takeaways for Improvement Exchanges
- Allows investors to enhance, construct, and add value to Replacement Property within a 1031 Tax-Deferred Exchange.
- Can be structured as either a Forward or Reverse Improvement Exchange, depending on timing and acquisition strategy.
- Permits the use of 1031 Exchange proceeds for renovations, new construction, or improvements.
- Only improvements completed within the 180-day exchange period are included in the Replacement Property value for tax deferral purposes.
- An Exchange Accommodation Titleholder (EAT) holds title to comply with IRS safe harbor guidance under Revenue Procedure 2000-37.
- Are more complex, requiring specialized structuring, and therefore cost more than traditional Delayed 1031 Exchanges.
- Early coordination with a Qualified Intermediary, lenders, and experienced advisors is essential.
Examples of Improvement 1031 Exchanges
Improvement Exchanges are used in a variety of practical investment scenarios, including:
- Retail Repositioning: An investor acquires a retail property that needs modernization and uses exchange proceeds for tenant improvements and façade upgrades before completing the exchange.
- Industrial Expansion: A taxpayer purchases land and constructs a warehouse facility within the exchange period to meet long-term operational objectives.
- Multifamily Renovation: An investor buys an underperforming apartment property and completes interior and amenity upgrades within the exchange period, increasing income potential and asset value.
- Customized Build-to-Suit Development: A taxpayer acquires vacant land and constructs improvements during the exchange tailored to a long-term tenant’s specifications.
Why Improvement (Build-to-Suit) 1031 Exchanges Are a Strategic Planning Tool
Improvement 1031 Exchanges are increasingly being incorporated into proactive investment planning strategies. As noted in our 1031 Trends for 2026 report, limited inventory continues to influence investor decision-making, prompting many to consider more flexible 1031 Exchange structures.
Whether implemented as a strategic plan or in environments where property selection is limited and investors are unwilling to settle for assets that do not fully meet their criteria, Improvement Exchanges provide flexibility, control and the ability to create value.
The Practical Use of an Improvement Exchange: Preserving Full Tax Deferral
For full tax deferral on any type of 1031 Exchange, the value of the Replacement Property must equal or exceed the net sales price of the Relinquished Property. One important and practical use of an Improvement 1031 Exchange is addressing a potential boot issue.
Consider the following simplified example:
- Relinquished Property net sales price: $100
- Replacement Property purchase price: $80
If a taxpayer acquires Replacement Property of lesser value than the Relinquished Property, the difference may be taxable boot. In this example, without a construction or improvement component, the taxpayer would have $20 of taxable boot.
Using an Improvement (Build-to-Suit) Structure:
- The Exchange Accommodation Titleholder (EAT) acquires the Replacement Property and completes $20 of improvements during the exchange period.
- Improvements may be funded using exchange funds, Exchanger’s personal funds, loan funds, or a combination thereof.
- By Day 180, the improved property (now valued at $100) is transferred to the taxpayer.
- The taxpayer has now acquired a $100 Replacement Property, eliminating the $20 boot exposure and achieving full tax deferral.
This illustrates how an Improvement Exchange is not merely a construction tool. It can be a strategic value-adding mechanism that preserves full tax deferral.
How the Improvement (Build-to-Suit) Exchange Structure Works
Proper structuring from the start is critical, as errors in timing, title holding, funding mechanics, or improvement completion can jeopardize exchange qualification.
Since exchange proceeds cannot be used to improve property, the investor already owns, a compliant parking structure must be established. IPX1031 utilizes an Exchange Accommodation Titleholder (EAT) to temporarily hold title to the Replacement Property during the improvement phase. This arrangement, commonly referred to as a “parking” structure, is designed to meet IRS safe harbor guidance.
During this period, the EAT holds title while exchange funds are used to complete the planned improvements. Only improvements that have been finished and are in place within 180 days will count toward the Replacement Property value. Once complete, the property is transferred to the investor to finalize the exchange.
Forward vs. Reverse Improvement (Build-to-Suit) Exchanges: Understanding the Difference
Improvement 1031 Exchanges can be structured as either Forward or Reverse transactions. While both utilize an Exchange Accommodation Titleholder (EAT) to hold title during the construction phase, the order of sale and acquisition, and the 45-day identification requirement, differ significantly.
Forward Improvement Exchange
This structure is commonly used when the taxpayer needs to enhance the Replacement Property to meet exchange value requirements. In a Forward structure:
- The Relinquished Property is sold first.
- Exchange proceeds are held by the Qualified Intermediary.
- The Replacement Property is acquired and “parked” by the EAT.
- Improvements are constructed while the EAT holds title.
Timeline Requirements:
- 45 days to identify the Replacement Property
- 180 days to complete the exchange and transfer the improved Replacement Property
Reverse Improvement Exchange
Reverse structures are often used when the investor must secure the Replacement Property immediately, oftentimes due to competitive market conditions or limited inventory. In a Reverse Improvement Exchange:
- The Replacement Property is acquired first (by the EAT).
- The Relinquished Property is sold later.
- Improvements must be completed while the Replacement Property is parked with the EAT.
Timeline Requirements:
- 45 days to identify the Relinquished Property
- 180 days to complete the exchange and transfer the improved Replacement Property
Explore Reverse and Improvement parking structures and further details about Reverse & Improvement Exchanges.
45-Day and 180-Day Deadlines in Improvement 1031 Exchanges
IRS deadlines remain strict in both structures. The 45-day identification period applies to either the Replacement Property (Forward) or the Relinquished Property (Reverse), depending on how the transaction is structured. The full exchange must be completed within 180 days.
Critically, only improvements completed and in place within that 180-day window are included in the Replacement Property value for tax deferral purposes.
Because construction timelines, permitting, lender coordination, and title considerations add additional complexity, early planning with a Qualified Intermediary and experienced advisors is essential.
IPX1031 RIED (Reverse & Improvement Exchange Division)
Given the added complexity of construction timelines, lender coordination, title considerations, and IRS compliance, these transactions require specialized oversight. IPX1031 has a dedicated Reverse and Improvement Exchange Division (RIED) focused specifically on structuring and facilitating Reverse and Improvement Exchanges nationwide. This specialized division works closely with investors, their advisors, lenders, environmental consultants, title companies and settlement officers to help ensure proper documentation, coordination, and compliance from start to finish.
A Strategic Approach to Building Value
Improvement 1031 Exchanges give investors the ability to actively shape the Replacement Property as part of a comprehensive exchange strategy. When properly structured, an Improvement 1031 Exchange becomes more than a tax deferral tool – it serves as a disciplined approach to creating and enhancing asset value.
As flexible exchange strategies continue to gain prominence, Improvement 1031 Exchanges remain a powerful solution for investors seeking both tax deferral and asset-level value creation. To learn more, visit:
Frequently Asked Questions About Improvement BTS 1031 Exchanges
What is an Improvement 1031 Exchange?
An Improvement 1031 Exchange, also known as a Build-to-Suit or Construction Exchange, allows a taxpayer to use 1031 Exchange proceeds to construct, renovate, or enhance Replacement Property during the exchange period. The improvements must be completed while an Exchange Accommodation Titleholder (EAT) holds title and within the 180-day exchange period to count toward the Replacement Property value.
Can improvements be made after I take title?
No. Only improvements completed while the EAT holds title and within the 180-day period count toward exchange value.
What is the difference between a Forward and Reverse Improvement Exchange?
The difference lies in the order of acquisition and sale:
- In a Forward Improvement Exchange, the Relinquished Property is sold first, and the taxpayer has 45 days to identify the Replacement Property.
- In a Reverse Improvement Exchange, the Replacement Property is acquired first (by the EAT), and the taxpayer has 45 days to identify the Relinquished Property.
For both structures, the improvements and exchange must be completed within 180 days.
What is the 45-day rule in an Improvement Exchange?
In a Forward structure, the Replacement Property must be identified within 45 days. In a Reverse structure, the Relinquished Property must be identified within 45 days. The identification must comply with IRS rules and be properly documented.
What is the 180-day rule in an Improvement Exchange?
The entire 1031 Exchange must be completed within 180 days. In an Improvement Exchange, only improvements that are constructed and in place while the EAT holds title and before the 180-day deadline count toward the Replacement Property value for tax deferral purposes.
Why is an Exchange Accommodation Titleholder (EAT) required?
Exchange proceeds cannot be used to improve property already owned by the taxpayer. To comply with IRS safe harbor guidance under Revenue Procedure 2000-37, the Replacement Property must be “parked” with an independent Exchange Accommodation Titleholder (EAT) during the improvement phase.
Can loan funds or personal funds be used for improvements?
Yes. Improvements may be funded using a combination of exchange proceeds, the Exchanger’s personal funds, and loan proceeds. Proper structuring and documentation are critical to ensure compliance and accurate value reporting.
What types of improvements qualify?
Qualifying improvements generally include capital improvements such as construction, structural renovations, tenant improvements, or ground-up development. Routine repairs or minor maintenance items may not meaningfully increase exchange value. All improvements must be completed and in place before the 180-day deadline.
What happens if construction is not completed within 180 days?
Only the value of improvements completed and in place by the end of the 180-day period will be included in the Replacement Property value. Any unfinished construction will not count toward exchange value, which may result in boot.
Are Improvement 1031 Exchanges more complex than traditional Delayed Exchanges?
Yes. Improvement Exchanges involve additional coordination among the Qualified Intermediary, EAT, lenders, contractors, title companies, and tax advisors. Because of the added legal and structural complexity, they involve higher transaction costs than a traditional Delayed 1031 Exchange.
When should I begin planning an Improvement Exchange?
Planning should begin before the Relinquished Property is sold (for a Forward structure) or before the Replacement Property is acquired (for a Reverse structure). Early coordination with a Qualified Intermediary and experienced advisors is essential to ensure proper structuring and compliance.
IPX1031 – Choose the Experts
IPX1031 is the largest and one of the oldest Qualified Intermediaries in the United States. As a wholly owned subsidiary of Fidelity National Financial (NYSE:FNF), a Fortune 500 company, IPX1031 provides industry leading security for your exchange funds as well as considerable expertise and experience in facilitating all types of 1031 Exchanges. Our nationwide staff, which includes industry experts, veteran attorneys and accountants, are available to help you and your legal and tax advisors. For additional information regarding IPX1031 and questions on 1031 Exchanges, please review:
1031 Exchange and Defer? Or Sell and Pay Taxes?
Opportunities of the 1031 Exchange
How Important is Your Qualified Intermediary?
Capital Gains Estimator
IPX1031 Knowledge Center
