Short answer: Yes. An improvement exchange, also called a build-to-suit exchange, lets you use exchange funds to build on or improve replacement property while an exchange accommodation titleholder holds title. Only improvements in place when the property is transferred to you, by day 180, count. You can also simply buy a finished new-construction property in a standard exchange.
Reviewed by Jon Hilley. Last updated September 29, 2026.
You can use a 1031 exchange for new construction in two ways. The simple one is buying a completed new building from a developer, which is a standard delayed exchange. The other is an improvement 1031 exchange, one of the types of 1031 exchanges, where exchange money pays for construction or renovation before you take title.
If you buy a newly built property from a builder, the question is only timing: the building must be finished and the purchase closed by day 180. A home or building still under construction on day 45 can be identified, but if it is not complete when you close, you receive only what exists at that point. A pre-construction purchase that will not close until after day 180 cannot be part of the exchange, however much you have paid in deposits.
The improvement exchange exists because work done after you own the property does not count toward your replacement value. An exchange accommodation titleholder (EAT) holds title while contractors are paid from exchange funds, then deeds you the improved property by day 180.
Key rules
- Only completed work counts: improvements in place when you receive the property count; construction after you take title is not like-kind property received in the exchange (Treas. Reg. §1.1031(k)-1(e)(4)).
- Identify the improvements: identify the property and describe the planned construction as specifically as practical by day 45 (Treas. Reg. §1.1031(k)-1(e)(2)).
- EAT safe harbor: the EAT holds title under a qualified exchange accommodation arrangement signed within 5 business days after it acquires title, and the exchange must finish within 180 days (Rev. Proc. 2000-37).
- Not on property you already own: the safe harbor does not apply to property you owned within 180 days before the EAT acquires it (Rev. Proc. 2004-51).
- Standard deadlines still apply: 45 days to identify and 180 days to acquire (IRC §1031(a)(3)).
- Partial completion can count: property you receive before construction is finished can still be the property you identified, but only the work in place at that point is like-kind property received (Treas. Reg. §1.1031(k)-1(e)(3)-(4)).
How a build-to-suit or construction exchange works
- Sell and park funds: your relinquished property sale closes and the proceeds go to the qualified intermediary.
- EAT buys the replacement: the EAT, usually through a single-purpose LLC, acquires the land or building with exchange funds and any loan.
- Build: you manage the project, and the EAT pays contractors from exchange funds as draws come in.
- Transfer by day 180: the EAT deeds you the property with whatever improvements are in place. Unspent exchange cash returned to you is boot.
Only permanent improvements in place when you take title count. Materials delivered to the site but not yet installed, and furniture or other movable personal property, generally do not. You may manage the project or act as the contractor yourself; the safe harbor allows it (Rev. Proc. 2000-37). Construction can continue after day 180 with your own money, but those costs are not part of the exchange. Our improvement exchange fee is $9,995, compared with $1,195 for a standard exchange, because of the title holding, draw management and extra entities involved.
Can you build on land you already own?
Not under the safe harbor. Because of Rev. Proc. 2004-51, you cannot park land you already own with an EAT and pay for construction with exchange funds. Related-party leasehold structures exist but are complex and aggressive, so talk to your CPA or tax attorney before trying one.
Starting construction before you sell
If the build needs more lead time, an EAT can acquire the replacement and start improvements before your sale closes, in a reverse improvement exchange. The EAT must still transfer the property to you within 180 days after it acquired title (Rev. Proc. 2000-37), so this can give you the full 180 days for construction, but no more.
Example: building runs past day 180
- Net sale price of relinquished property: $800,000 (no mortgage)
- Adjusted basis: $300,000 (after $150,000 of depreciation)
- Realized gain: $500,000
- Land bought by the EAT: $450,000
- Planned improvements: $350,000
- Improvements in place at day 180: $250,000
- Value received in the exchange: $700,000
- Unspent exchange funds returned (boot): $100,000
- Tax at 25% on $100,000: $25,000
- Net investment income tax at 3.8%: $3,800
- Total federal tax: $28,800
- Gain deferred: $400,000
Assumptions: the full 25% rate applies because the boot is less than prior depreciation, the 3.8% net investment income tax applies, and state tax is not included. Had the full $350,000 of work been in place when the EAT transferred the property, the investor would have received $800,000 of replacement property and deferred the entire $500,000 gain. The remaining $100,000 of construction after day 180 has to be paid with outside money.
Other questions investors ask
Can a 1031 exchange be used for improvements?
Yes, but only improvements to replacement property made before you take title, through an EAT in an improvement exchange. Exchange funds cannot pay for work on property you already own or for work done after you receive the replacement property.
Common mistakes
- Optimistic construction schedules: the most common problem we see is a build that cannot realistically be done in 180 days. Permits, not construction, are often what slips.
- Prepaying for work not yet done: deposits for materials not delivered or installed may not count as improvements in place.
- Waiting to line up financing: the lender has to lend to the EAT's entity, and we see many lenders say no. Confirm the loan before the sale closes.
- No backup identification: we often suggest identifying a finished property or a Delaware statutory trust interest alongside the build site, so unspent funds have somewhere to go if construction runs behind.
