Improvement Exchanges

An Improvement Exchange gives the Exchanger the opportunity to use proceeds from the sale of the Relinquished Property (Exchange Funds) for new construction or renovations to the Replacement Property. In the most common type of Improvement Exchange, the Exchanger sells the Relinquished Property through a Qualified Intermediary in a Delayed Exchange, and then acquires the Replacement Property after it has been improved using the Exchange Funds.

Exchange Funds cannot be used to improve property already owned by the Exchanger, so an Exchange Accommodation Titleholder (EAT) is needed to hold title to the property while the improvements are being made.  Rev. Proc. 2000-37 provides a “safe harbor” for structuring a Build-to-Suit Exchange using an EAT.

Here are the steps for a typical Improvement Exchange transaction:


  1. A Delayed Exchange is set up through a Qualified Intermediary (QI) like IPX1031.  The Relinquished Property (RLQ) is sold, and the Exchange Funds are deposited with the QI.
  2. The exchange must be concluded within 180 days of the Relinquished Property (RLQ) sale.  Replacement Property (RPL) must be identified, in writing, within 45 days of that date.  The anticipated improvements must also be identified, with as much detail as is practicable.
  3. Prior to closing on the purchase of the RPL, the Exchanger enters into a Qualified Exchange Accommodation Agreement (QEAA) with the EAT and assigns its rights in the purchase contract to the EAT.
  4. The EAT then acquires title to the RPL. IPX1031 holds each parked property in a separate single member LLC.  (The EAT and LLC are jointly referred to as the “EAT”)
  5. The Exchanger or its designated representative acts as the LLC Manager, as well as the Project Manager to oversee all aspects of the construction.
  6. The Project Manager sends invoices to the EAT for payment directly to the vendors. Exchange Funds cannot be used to reimburse the Exchanger for any out-of-pocket expenses.
  7. Upon the earlier of the end of the 180-day Exchange Period or completion of construction, the EAT will transfer the RPL to the Exchanger to complete the exchange.
  8. In most cases the RPL is transferred by an assignment of the sole membership interest in the LLC, rather than by deed. Transfer by assignment keeps the title insurance and any loan documents in place. Selecting the appropriate method for the transfer should be determined after a thorough review of transfer tax and other legal issues by the Exchanger’s tax and legal advisors.

To maximize the benefit of an exchange the Exchanger must ultimately acquire RPL with a value equal to or greater than the value of the RLQ and use all the exchange equity in the acquisition of the improved property.

Only Exchange Funds disbursed for materials actually in place and services actually performed will count toward the exchange value.  Improvements made after the Exchanger takes title to the RPL are not considered “like-kind” and will not qualify. Treas. Reg. §1.1031(k)-1(e). Unused Exchange Funds may be taxable as boot. Exchange Funds deposited in an escrow holdback for post-closing improvements will not qualify even if the funds are deposited before the Exchanger takes title to the RPL.

Improvement Exchanges are less complicated when construction can be paid for with cash loaned to the EAT by the Exchanger or with Exchange Funds advanced by the QI. If a loan from a third-party lender is required, the Exchanger should seek lender approval prior to beginning the exchange. The EAT, as titleholder to the RPL, will likely be the named borrower on the loan. To protect the EAT from liability in the event of default by the Exchanger the loan must be non-recourse as to the EAT. The Exchanger is typically required to guarantee the loan to the EAT.

Reverse Improvement Exchange

Rev. Proc. 2000-37 also permits a “Reverse” Improvement Exchange, where the EAT acquires the RPL and commences the construction of improvements prior to the sale of the RLQ.

Here are the steps for a typical Reverse Improvement Exchange transaction:


  1. The Exchanger enters into a Qualified Exchange Accommodation Agreement (QEAA) with the EAT and assigns its rights in the purchase contract to the EAT.
  2. Since the RLQ has not yet sold, the Exchanger or a third-party lender must provide funds to the EAT to acquire and improve the RPL.
  3. The EAT then acquires title to the RPL. IPX1031 holds each parked property in a separate single member LLC.  (The EAT and LLC are jointly referred to as the “EAT”).
  4. The exchange must be concluded within 180 days of the EAT acquiring title to the RPL.  The RLQ must be identified, in writing, within 45 days of that date.
  5. The Exchanger or its designated representative acts as the LLC Manager, as well as the Project Manager to oversee all aspects of the construction.
  6. The Project Manager sends invoices to the EAT for payment directly to the vendors. Exchange Funds cannot be used to reimburse the Exchanger for any out-of-pocket expenses.
  7. At some point prior to the end of the 180-day parking period a Delayed Exchange is set up through a QI.  The RLQ is sold, and the Exchange Funds are deposited with the QI.
  8. The Delayed Exchange has its own 45 and 180-day time frames.  Depending on the amount of Exchange Funds from the RLQ sale, the Exchanger can identify additional RPLs, apart from the parked property.
  9. Upon the earlier of the end of the 180-day holding period or the completion of construction, the EAT will transfer the RPL to the Exchanger to complete that portion of the exchange.

Reverse 1031 Exchange FAQs  & Info

Read more on Reverse Highlights
Read more about Reverse and Improvement Exchange Frequently Asked Questions here.
Read more on Reverse Parking structures

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