A 1031 improvement exchange, also called a build-to-suit or construction exchange, lets exchange funds pay for building or renovating replacement property before you take title. An exchange accommodation titleholder holds title while the work is done, and only the land and improvements in place on the day the property is transferred to you count as replacement property. The work must fit inside the exchange deadlines, and it cannot be done on property you already own.
How an improvement exchange works
The regulations allow replacement property that is still being built when you identify it (Treas. Reg. 1.1031(k)-1(e)(1)), and the ordinary rules of a 1031 exchange still apply. But you must receive real property, not a promise to build. Property exchanged for services, including construction, does not qualify, and construction after you receive the property is not like-kind property (Treas. Reg. 1.1031(k)-1(e)(4)). Because you also cannot exchange into improvements on land you already own, someone else must hold title during construction.
That party is an exchange accommodation titleholder, often acting through a single-member LLC, under the IRS safe harbor in Rev. Proc. 2000-37. It cannot be you or a disqualified person, such as your agent (Rev. Proc. 2000-37, sec. 4.02(1); Treas. Reg. 1.1031(k)-1(k)). A sell-first improvement exchange usually runs this way:
- Before your sale closes, you sign an exchange agreement with a qualified intermediary and arrange for the titleholder.
- Your property sells and the intermediary holds the proceeds. The agreement must bar you from receiving, borrowing, or pledging the money before the exchange ends, apart from narrow exceptions (Treas. Reg. 1.1031(k)-1(g)(6)).
- Within 45 days after the sale, you identify the replacement property in writing.
- The titleholder takes title, and within five business days you and the titleholder sign a written qualified exchange accommodation agreement (Rev. Proc. 2000-37, sec. 4.02(3)).
- Construction proceeds, paid with exchange funds under the exchange documents. You may supervise the work or act as contractor, lend to the titleholder, or guarantee its loan (Rev. Proc. 2000-37, sec. 4.03(2), (3), (5)).
- Before the earliest deadline, the titleholder transfers the property, as built so far, to you (Rev. Proc. 2000-37, sec. 4.02(5)).
In a buy-first version, the titleholder buys and starts building before your property sells, and you identify the property you are selling within 45 days after the titleholder takes title (Rev. Proc. 2000-37, sec. 4.02(4)). That is a reverse exchange with construction added.
Only work in place when you take title counts
If construction is unfinished when you receive the property, it counts only to the extent it is real property under local law that day: the land and the improvements actually built (Treas. Reg. 1.1031(k)-1(e)(3)(iii)). In the regulation's example, a building 20 percent complete counts to the extent of the land and that 20 percent (Treas. Reg. 1.1031(k)-1(e)(5)). Money prepaid for work not yet done does not count, and exchange funds not spent on property you receive by the deadline are taxable boot to the extent of your gain (26 U.S.C. 1031(b)).
Example, with round numbers. An investor sells a building for $2,000,000 after closing costs, with no mortgage and a $900,000 gain. A titleholder buys land for $500,000, and $1,200,000 of construction is in place when it transfers the property to the investor. The investor has received $1,700,000 of like-kind property. The other $300,000, whether paid out as cash or spent on construction after the transfer, did not buy like-kind property, so $300,000 of the gain is taxable. Finishing the building later does not change that.
- Materials count only once installed. Improvements to land are permanently affixed structures and their structural components (Treas. Reg. 1.1031(a)-3(a)(2)). Pay draws for installed work, not deliveries.
- Document what exists on the transfer date, for example with an architect's completion certificate and dated photographs.
- Stay close to the identified plans. Usual construction changes are disregarded, but after substantial changes the property received is not treated as the property identified (Treas. Reg. 1.1031(k)-1(e)(3)(i)).
Deadlines
All of these apply, and construction delays and permit reviews do not extend any of them. The property must reach you by whichever of the last two comes first.
- 45 days after the sale: identify the replacement property in a signed writing, with a legal description of the land and as much detail about the planned improvements as is practicable (Treas. Reg. 1.1031(k)-1(c), (e)(2)(i)). Backups can be named under the three-property rule or the 200 percent rule.
- End of the exchange period: you must receive the property by the earlier of 180 days after the sale or the due date, including extensions, of your tax return for the year of the sale (26 U.S.C. 1031(a)(3)). For a late-year sale, the return due date can come first unless you extend. See the 180-day rule.
- 180 days after the titleholder takes title: the titleholder must transfer the property to you, and your relinquished and replacement properties together cannot be held by a titleholder for more than 180 days (Rev. Proc. 2000-37, sec. 4.02(5), (6)).
Where improvement exchanges fail
Improving property you already own
Trading real estate you own for improvements on land you also own is not a like-kind exchange (Rev. Proc. 2004-51, sec. 2.05, citing DeCleene v. Commissioner, 115 T.C. 457 (2000)). Deeding the land to a titleholder first does not help: the safe harbor does not apply to replacement property you owned at any time in the 180 days before the titleholder took title (Rev. Proc. 2000-37, sec. 4.05, added by Rev. Proc. 2004-51).
Example of a structure that fails. An investor deeds a motel the investor owns to a titleholder, sells another building, and uses the proceeds to renovate the motel before taking it back. Because the investor owned the motel within those 180 days, the safe harbor does not apply, and the investor is trading for improvements on property the investor already owns, so the sale does not qualify for deferral.
One variation is unsettled. In 2004 the IRS said it was continuing to study transactions in which a person related to the taxpayer leases land to an accommodation party, which builds improvements and transfers the improved leasehold to the taxpayer for other real estate (Rev. Proc. 2004-51, sec. 2.06). It may also raise the related-party rules of 26 U.S.C. 1031(f). Raise it with your tax adviser before the sale closes. See also whether you can buy property you already own.
Construction that runs past the deadline
A project that cannot be substantially built within the deadlines cannot be fully covered by the safe harbor. The choices are partial deferral, paying tax on exchange funds that did not buy real property, or starting construction well before the sale with an accommodation party holding title longer than the safe harbor allows.
In Estate of Bartell v. Commissioner, 147 T.C. 140 (2016), the Tax Court upheld an exchange in which a facilitator held title for 17 months while the taxpayer built, under an arrangement that began before the safe harbor took effect. The IRS has said it will not follow Bartell on this point: outside the safe harbor, there is no exchange if the taxpayer, rather than the accommodation party, had the benefits and burdens of owning the replacement property before transferring the relinquished property (IRS Action on Decision 2017-06). Expect the IRS to take that position, and raise the structure with your tax adviser first.
Property built to sell
Section 1031 does not apply to real property held primarily for sale (26 U.S.C. 1031(a)(2)). A building you plan to renovate and resell, or to convert into condominiums for sale, does not qualify. A build-to-rent project held for rental income can.
Renovating a historic building
The same rules apply: renovation counts only if it is done while the titleholder holds title and is in place when you take title. Work after you take title does not count and does not change your deadlines (Treas. Reg. 1.1031(k)-1(e)(4)).
If the building is in a local historic district, plan for the historic commission to review exterior work before a building permit issues. In Baltimore City, the Commission for Historical and Architectural Preservation (CHAP) handles that review as part of the building permit process. If the review is still pending when the deadlines start running, it uses up time within them.
The federal rehabilitation credit
The credit is 20 percent of qualified rehabilitation expenditures on a certified historic structure, claimed ratably over five years starting with the year the building is placed in service (26 U.S.C. 47(a), (c)(1)(A)). The building must be substantially rehabilitated, meaning expenditures during a 24-month period you select exceed the greater of its adjusted basis or $5,000, and the rehabilitation must be certified (26 U.S.C. 47(c)(1)(B), (c)(2)(B)(iv)).
Buying a historic building earns no credit, because the cost of acquiring a building is not a qualified rehabilitation expenditure (26 U.S.C. 47(c)(2)(B)(ii)). In an improvement exchange, the titleholder is the federal tax owner while it holds title (Rev. Proc. 2000-37, sec. 4.02(3)), and a buyer can count a prior owner's rehabilitation spending only if conditions are met, including that the building was not used in between and no one else claims the credit (Treas. Reg. 1.48-12(c)(3)(ii)). If you want the credit for work done during the exchange, settle it with your tax adviser before work begins.
Credit recapture
Disposing of a credit building within five years after it is placed in service recaptures some or all of the credit: 100 percent within the first full year, then 80, 60, 40, and 20 percent (26 U.S.C. 50(a)(1)). An exchange is a disposition, and the statute's exceptions, such as transfers at death, do not include like-kind exchanges (26 U.S.C. 50(a)(6)). When you can, time the sale for after the recapture period. This is separate from depreciation recapture. Maryland's state credit has its own plan approval and recapture rules (Md. Code, State Finance and Procurement 5A-303).
What to do before the sale closes
- Get a construction and draw schedule showing what will be installed by the earliest deadline, and have your tax adviser estimate the tax if the work runs behind.
- Confirm that the lender will lend to the titleholder's LLC, that the contractor will sign with the titleholder as owner, and that title insurance and lien arrangements cover the titleholder.
- Ask the settlement attorney how transfer and recordation taxes apply to the titleholder's purchase and to its transfer to you. For Maryland, see transfer and recordation taxes in 1031 exchanges.
- Set up the exchange agreement and the titleholder before closing. You can start an exchange with BlueLion.
Common questions
Can I use 1031 exchange money to build on the replacement property?
Yes, while an exchange accommodation titleholder holds title, and only for work in place when the property is transferred to you. The improvements do not have to be finished.
Can a 1031 exchange fund a redevelopment project?
Only the part built before you take title, within the deadlines. Exchange funds left unspent are taxable to the extent of your gain.
What does an improvement exchange cost?
BlueLion charges one flat fee of $7,500 for an improvement exchange. See pricing.
Primary sources
- 26 U.S.C. 1031 (like-kind exchanges)
- Treas. Reg. 1.1031(k)-1 (deferred exchanges and property to be produced)
- Treas. Reg. 1.1031(a)-3 (definition of real property)
- Rev. Proc. 2000-37, 2000-40 I.R.B. 308 (exchange accommodation titleholder safe harbor)
- Rev. Proc. 2004-51, 2004-33 I.R.B. 294 (property the taxpayer already owned)
- IRS Action on Decision 2017-06 (nonacquiescence in Estate of Bartell)
- 26 U.S.C. 47 (rehabilitation credit)
- 26 U.S.C. 50 (credit recapture)
- Treas. Reg. 1.48-12 (qualified rehabilitation expenditures)
- Md. Code, State Finance and Procurement 5A-303 (Maryland historic tax credit)
This guide is general information about 1031 exchanges as of September 2026, not tax or legal advice for your transaction. BlueLion 1031 serves as a qualified intermediary and does not provide tax, legal, investment, or real estate brokerage advice.
Go deeper
This guide draws on these chapters of the BlueLion 1031 reference.
