How to acquire property and add value through construction within your exchange
An improvement exchange (also called a build-to-suit or construction exchange) allows you to acquire property AND make improvements to it within your 1031 exchange. This is ideal when you want to purchase undervalued property and add value through construction, or build new on land.
Unlike a standard exchange where you simply purchase existing property, an improvement exchange uses a special structure called an Exchange Accommodation Titleholder (EAT) to hold title while improvements are made. This allows the value of those improvements to count toward your exchange requirement.
Improvement exchanges are not for everyone—they're more complex and expensive than standard exchanges. But they can be powerful when used in the right situations:
You found a property below your exchange requirement that needs significant improvements to meet value requirements.
Example: Sold property for $2M, found replacement for $1.5M, need $500K in improvements to avoid boot.
You want to acquire land and build new construction within your exchange.
Example: Purchase vacant lot for $500K, construct new building for $1.5M, total value $2M.
You want to acquire a building and add units or square footage to increase value.
Example: Buy 4-unit apartment for $1M, add 2 more units for $500K, total value $1.5M.
You want to acquire property in a different market and upgrade it to match your property sale value.
Example: Sold Class A office for $3M, buying Class B office for $2M, invest $1M in upgrades.
An improvement exchange allows you to acquire property and make improvements within your 1031 exchange. The key difference: an Exchange Accommodation Titleholder (EAT) holds title during construction, allowing improvement costs to count toward your exchange requirement.
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During construction (Phase 4), the EAT holds legal title, not you. You have beneficial interest, but the EAT is the owner. Title transfers to you only after construction is 100% complete.
All improvements must be 100% COMPLETE by Day 180 from your property sale. No extensions, no exceptions. Partial completion = taxable boot on uncompleted improvements. Factor in weather, permitting, contractor delays.
Exchange Accommodation Titleholder (EAT) holds legal title during construction. You have beneficial interest, but EAT is the owner. EAT transfers title to you once construction is complete. EAT fees typically $15,000-$30,000 (in addition to QI fees).
New construction, major renovations, adding units/square footage = QUALIFIED. Minor repairs, landscaping, furnishings = NOT QUALIFIED. Only qualified improvements count toward exchange value.
QI fees + EAT fees + financing costs. More professionals required (EAT, contractor, lender). Financing can be challenging (loan must be in EAT's name or cash required).
Improvement exchanges are high-reward but high-risk. Here's what can go wrong:
Weather, permitting, contractor delays can push completion past Day 180. If improvements aren't done by Day 180, incomplete portions become taxable boot.
Solution: Build in buffer time, use experienced contractors, start early
Traditional lenders hesitant to lend to EAT entities. Loan must be in EAT's name (not yours), or you need cash.
Solution: Work with lenders experienced in improvement exchanges, or use cash
EAT fees ($15,000-$30,000), QI fees ($1,000-$2,000), construction costs. Total cost can exceed standard exchange by $20,000-$50,000+.
Solution: Ensure improvement adds enough value to justify fees
If construction not 100% complete by Day 180, you'll owe tax on uncompleted portion. Certificates of occupancy, final inspections must be done by deadline.
Solution: Conservative timeline, experienced EAT and contractor
EAT owns property during construction (not you). Insurance, liability, and control issues during construction.
Solution: Clear EAT agreement outlining roles and responsibilities
Improvement exchanges are complex. Use these resources to plan your construction timeline and understand all exchange types:
Understand the reverse exchange structure and timeline
Calculate your critical 180-day construction deadline
Determine if improvement exchange is right for you
Find a QI experienced with improvement exchanges
Connect with Exchange Accommodation Titleholders
Connect with EAT specialists and QIs who understand the complexities of improvement exchanges and can guide you through the 180-day construction timeline.
Connect with professionals who understand improvement exchanges and can guide you through the 180-day construction timeline.