An improvement exchange, sometimes called a build-to-suit or construction exchange, lets exchange funds pay for upgrades, renovations, or new construction on the replacement property rather than just the purchase price. It's useful when the ideal replacement isn't quite ready as-is; a Park City exchanger moving into a commercial or mixed-use property might need to add square footage, reconfigure a floor plan, or bring a building up to current code before it functions the way they need, and an improvement exchange allows that construction budget to be part of the tax-deferred transaction rather than a separate out-of-pocket cost. Done well, it lets an exchanger acquire a raw or underbuilt property and turn it into a fully finished replacement, all inside the same exchange.
Why the Exchanger Can't Just Buy Then Build
The obstacle is the same constructive receipt issue that governs every exchange: once the exchanger owns the replacement property outright, any further improvement spending is the exchanger's own money going into their own asset, not an exchange transaction. To keep the improvement dollars inside the exchange, an exchange accommodation titleholder holds title to the replacement property while construction happens, using exchange funds to pay contractors and suppliers directly, and only transfers title to the exchanger once the improvements are complete or the 180-day deadline arrives, whichever comes first. That titleholder arrangement is the same parking mechanism used in a reverse exchange, just applied to construction spending rather than an early purchase, which is why the two structures are sometimes combined into a single reverse improvement exchange.
The 180-Day Deadline Doesn't Move for Construction
This is the detail that catches exchangers off guard: all identified improvements have to be completed, or at minimum in place and paid for through the exchange funds, within the same 180-day window that governs every other exchange. Whatever value of construction isn't finished and paid for by day 180 doesn't count as replacement property value for deferral purposes; the exchanger simply receives the property in whatever state it's in in day 180, which for a build-to-suit project can mean the improvements are treated as incomplete for exchange purposes even if the crew is scheduled to finish two weeks later. Realistic construction budgeting and a contractor who can commit to a firm timeline matter as much as the tax mechanics.
What Kind of Improvements Qualify
Improvements have to add value to the real property itself, structural additions, tenant build-outs, site work, or new construction on raw land, rather than personal property or business equipment installed inside the building. Since 2018's narrowing of like-kind property to real estate only, this distinction matters more than it used to: a build-out that includes fixtures permanently attached to the structure generally qualifies, while movable equipment or furnishings purchased with exchange funds typically doesn't count toward the replacement value.
Coordinating Construction, the EAT, and the Deadline
Because an improvement exchange layers a construction timeline on top of the standard exchange deadlines, it needs more upfront coordination than a straightforward purchase: identifying the property and the general scope of improvements within 45 days, getting contractor bids and permits moving quickly, and structuring draws from the exchange account so funds are disbursed against completed work. Exchangers pursuing this structure typically start improvement exchange planning before the relinquished property even closes, since the construction timeline is usually the tightest constraint in the entire exchange. In a market with a compressed building season, like much of the Wasatch Back, that planning window matters even more, since permitting and contractor availability can add weeks before a single shovel goes in the ground.
Common 1031 Exchange Questions
Can I use 1031 exchange funds to renovate the replacement property
Yes, an improvement exchange allows exchange funds to pay for renovations, build-outs, or new construction on the replacement property, held through an exchange accommodation titleholder until the improvements are complete.
Why can't I just buy the replacement property and then build with exchange funds
Once the exchanger holds title, any further spending is outside the exchange; an accommodation titleholder has to hold title during construction so the improvement dollars stay part of the tax-deferred transaction.
Does the construction deadline extend beyond 180 days
No, all improvements paid for with exchange funds have to be complete and in place by day 180 of the exchange; unfinished work at that point doesn't count toward the replacement property's value.
Do furnishings or equipment purchased with exchange funds qualify as improvements
Generally no, only improvements that add value to the real property itself, like structural work or permanent fixtures, qualify; movable equipment or furnishings typically don't count toward replacement value.
When should I start planning an improvement exchange
Before the relinquished property closes, since construction timelines are usually the tightest constraint, and permits, contractor bids, and draw schedules need to be moving before the 45-day and 180-day clocks start.
Who pays contractors during an improvement exchange
The exchange accommodation titleholder disburses exchange funds directly to contractors and suppliers while it holds title, so the exchanger doesn't pay for the work out of pocket or through personal accounts.
