1031 Exchanges
Construction and Improvement 1031 Exchanges in Texas
A construction or improvement 1031 exchange lets you put exchange proceeds toward renovations, new construction, or build-to-suit work on your replacement property. The timing, title, and completion rules are strict, and the work has to be handled correctly before your exchange deadlines hit.
Exchange type
Construction / Improvement
Key deadlines
45-day identification and 180-day completion
Our role
Qualified intermediary (QI)
Last updated
What is a construction or improvement 1031 exchange?
A construction or improvement 1031 exchange, also called a build-to-suit exchange, lets you use tax-deferred exchange funds to make improvements on your replacement property. The improvements have to be completed, and the exchange equity spent, before your exchange deadline. It is not the same as buying a property, taking title, and renovating later, and it usually requires an exchange accommodation titleholder to hold title while the work is done. Confirm the details with your CPA, tax attorney, or qualified intermediary.
A construction or improvement 1031 exchange, also called an improvement exchange or a build-to-suit exchange, is for investors who want to put exchange funds toward improving their replacement property rather than just buying it as is.
It is most useful when your replacement property costs less than your relinquished property sold for, and improvements can raise the replacement value enough to defer more of your gain. Completed improvements are what matter, not future plans, and the work has to fit inside your exchange deadlines.
This structure is more complex than a standard delayed exchange. It usually involves an extra party, an exchange accommodation titleholder, and tighter coordination among everyone on the transaction.
When a Construction or Improvement Exchange Makes Sense
- You are buying a rental that needs rehab before it meets your investment goals
- You are buying commercial property that needs tenant improvements or a buildout
- You are buying land or property where construction is part of the intended replacement value
- You are buying below your relinquished property value and want to put exchange funds toward eligible improvements
- You need construction or private money financing alongside your exchange structure
When This Structure Can Be Risky
- Permits take too long to pull
- Contractors miss deadlines, or weather, inspections, utilities, or supply delays interfere
- Large ground-up construction cannot realistically finish within your exchange period
- Your identification is vague or incomplete
- Title or control of funds is taken too early and jeopardizes your deferral
How a Construction or Improvement Exchange Works
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Sell your relinquished property
You sell your original (relinquished) property to start the exchange.
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Assign your proceeds to the exchange structure
Your exchange proceeds are assigned to, or held through, the proper exchange structure. You do not take the funds directly.
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Identify your property and improvements (45 days)
Your replacement property and your planned improvements are identified in writing within your 45-day identification period, described in as much detail as is practicable.
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Park title with an accommodation titleholder
If your structure requires it, an exchange accommodation titleholder (EAT) parks title to your replacement property while improvements are made.
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Use exchange funds for acquisition and improvements
Your exchange funds pay for the acquisition and eligible improvements through the proper structure, not directly from you.
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Complete the work before your deadline
Construction and improvements are completed, to the extent they are going to count, before your exchange deadline.
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Receive your improved replacement property
You receive your improved replacement property within the required exchange period.
Who Is Involved in a Construction or Improvement Exchange
A construction or improvement exchange has more moving parts than a standard delayed exchange. Each party has a distinct job, and they have to coordinate before your relinquished property closes.
| Taxpayer / investor | You sell your relinquished property and ultimately receive your improved replacement property. You cannot take actual or constructive receipt of the exchange funds. |
|---|---|
| Qualified intermediary (QI) | Holds your exchange proceeds and prepares your exchange documents so you never take receipt of the funds. Cedar Top Lending can act as your QI. |
| Exchange accommodation titleholder (EAT) | A separate entity that may temporarily hold, or park, title to your replacement property while improvements are made, under a qualified exchange accommodation arrangement (QEAA). |
| Title company | Handles closing, the title commitment, and the lender title policy on your relinquished and replacement properties. |
| Lender | Finances the acquisition and, where applicable, the construction or bridge funds. Cedar Top can be your lender here on Texas investment property. |
| Contractor / builder | Performs the actual improvements on a schedule that has to fit inside your exchange deadline. |
| CPA / tax attorney | Advises whether your transaction qualifies and how it is reported. Cedar Top does not provide tax or legal advice. |
The 45-Day and 180-Day Rules
- Your 45-day identification period and your 180-day exchange period both start when your relinquished property sale closes.
- The two clocks run at the same time. It is not 45 days plus 180 days. Your 45-day window sits inside your 180-day window, so by day 45 your replacement property and your planned improvements need to be identified in writing.
- In an improvement exchange, the identification usually has to describe your replacement property and the improvements to be made in as much detail as is practicable, not just name an address.
- Improvements only count toward the value you receive if they are completed before you take title to your replacement property and within the 180-day period.
- Deadlines are strict and are not extended for permit delays, weather, or contractor problems. Coordinate the schedule with your qualified intermediary and tax advisor before your relinquished property closes.
Sources: IRS - Like-Kind Exchanges (Real Estate Tax Tips) , IRS - Instructions for Form 8824 (Like-Kind Exchanges)
Who Holds Title During Construction?
This is where improvement exchanges differ most from a standard delayed exchange. In many cases you cannot simply buy your replacement property, take title, and then count improvements made after closing.
Instead, an exchange accommodation titleholder (EAT) may temporarily hold, or park, title to your replacement property while the improvements are completed. The arrangement is generally done under a qualified exchange accommodation arrangement (QEAA), the IRS safe harbor described in Revenue Procedure 2000-37. Your qualified intermediary coordinates the exchange funds and the exchange documents, and the EAT transfers your improved property to you within the exchange period.
Improvement exchanges usually require more than a standard delayed exchange. Depending on your structure, an exchange accommodation titleholder may need to temporarily hold title while improvements are completed. Involve your tax advisor and your qualified intermediary before your relinquished property closes, not after.
What Improvements Count
- Improvements completed before you take title to your replacement property
- Improvements physically incorporated into the real property, such as a new structure, an addition, or a buildout
- Eligible construction, renovation, or tenant improvement costs when your exchange is structured correctly
- Your acquisition cost plus the value of completed improvements, counted toward your replacement value
What Usually Does Not Work
- Work completed after you already received your replacement property
- Taking actual or constructive receipt of your exchange proceeds
- Paying contractors yourself from exchange funds outside the proper structure
- Vague or open-ended descriptions of future improvements at identification
- Improving property you already own, unless a qualified advisor can structure something valid
- Personal property or anything that is not like-kind real property
- Anything that misses your 45-day or 180-day deadline
Example: using improvements to avoid taxable boot
| Relinquished property sale | $900,000 |
|---|---|
| Replacement property purchase | $750,000 |
| Value gap (possible taxable boot) | $150,000 |
| Possible fix | Eligible, completed improvements through a properly structured improvement exchange |
An investor sells a Texas rental property for $900,000 and wants to acquire a replacement property for $750,000. Buying only the $750,000 property could leave roughly $150,000 of unused exchange value, which may be treated as taxable boot.
With a properly structured improvement exchange, the investor may be able to put exchange funds toward eligible, completed improvements before the exchange deadline, helping the replacement property reach the value needed to defer more of the gain. The details decide the outcome: the improvements have to be identified, funded, completed, and transferred correctly, and the deadlines still apply.
This is a simplified illustration, not tax advice. Whether any amount is taxable depends on your specific facts. Confirm with your CPA or tax attorney.
Common Construction or Improvement Exchange Mistakes
- Waiting until after closing to ask whether improvements can be part of the exchange
- Assuming planned or future improvements count automatically
- Forgetting that the 45-day and 180-day clocks overlap and both run from your sale closing
- Using vague identification language instead of describing the property and the improvements
- Choosing a construction project that cannot realistically finish inside your exchange period
- Taking title to your replacement property too early
- Taking actual or constructive receipt of your exchange funds
- Not coordinating your QI, EAT, title company, lender, CPA, and attorney up front
- Underestimating construction draws, inspections, and lien or title issues
How Cedar Top Helps Texas Investors
Cedar Top Lending works with Texas real estate investors on the financing and transaction timeline side of an improvement exchange. We do not provide tax or legal advice, and we do not decide whether your transaction qualifies for tax deferral. That is for your CPA, tax attorney, and qualified intermediary.
- Help you think through timing, transaction structure, and financing needs before you sell
- Act as your qualified intermediary to hold exchange funds and prepare exchange documents
- Coordinate with your CPA, attorney, title company, and contractor where applicable
- Help you evaluate whether your construction timeline and financing structure look realistic for the deadlines
- We can lend on your construction or your acquisition too
Related financing: New Construction Loans and our draw process .
Before you sell your relinquished property or close on a replacement property, talk with us about the financing and transaction timeline. Improvement exchanges are much harder to fix once the transaction is already in motion.
Construction / Improvement Exchange FAQs
Can I use 1031 exchange funds for construction or renovations?
Yes, through a construction or improvement exchange. Exchange funds can go toward building or renovating your replacement property when the work is completed before you take title, within the exchange period, and the funds flow through the proper structure rather than to you directly. Work done after you already own the property does not count. Confirm the specifics with your qualified intermediary and tax advisor.
Do improvements have to be completed within 180 days?
Yes. To count as part of the replacement property value you receive, improvements need to be completed within the 180-day exchange period and before the replacement property transfers to you. Unfinished work does not count the way investors expect.
Does the 180-day period start after the 45-day period?
No. Your 45-day identification period and your 180-day exchange period both start on the day your relinquished property sale closes, and they run at the same time. It is not 45 days plus 180 days. Your 45-day window sits inside your 180-day window.
Who holds title during an improvement exchange?
In most improvement exchanges an exchange accommodation titleholder (EAT) may temporarily hold, or park, title to your replacement property while the improvements are completed, then transfers the improved property to you within the exchange period. The exact structure depends on your transaction and should be set up with your qualified intermediary and tax advisor.
What is an Exchange Accommodation Titleholder?
An exchange accommodation titleholder, or EAT, is a separate entity that temporarily holds title to property in a parking arrangement so an exchange can work. It is commonly used in reverse and improvement exchanges under a qualified exchange accommodation arrangement (QEAA), the IRS safe harbor in Revenue Procedure 2000-37.
Can I improve property I already own?
Usually no. Making improvements to property you already own does not qualify as receiving like-kind replacement property, because you are not acquiring a new property through the exchange. The situations where something like this can work are limited and complex, so do not assume it works without guidance from a qualified exchange advisor and your tax attorney.
Can I pay contractors directly with exchange funds?
No. Paying contractors yourself out of the exchange proceeds can be treated as taking receipt of the funds, which jeopardizes the exchange. Exchange funds are held and disbursed through the proper structure, usually by your qualified intermediary or your accommodation titleholder. Confirm the mechanics before any work is paid for.
What happens if construction is not finished in time?
If your improvements are not completed within the 180-day period, the unfinished work does not count toward your replacement value, and you can end up with taxable boot for the shortfall. This is why your construction schedule has to be realistic before your relinquished property closes. Talk to your tax advisor about the consequences for your situation.
Is an improvement exchange the same as a reverse exchange?
No, but they are related and both often use an accommodation titleholder. A reverse exchange is about acquiring your replacement property before you sell your relinquished property. An improvement exchange is about using exchange funds to improve your replacement property. Some transactions combine elements of both.
Can Cedar Top help with construction financing?
Yes. We lend on Texas investment property, so the same team can be your qualified intermediary and fund the construction or bridge loan alongside your exchange. We do not provide tax or legal advice.
When should I start planning an improvement exchange?
Before you sell your relinquished property. Your structure, title arrangement, financing, and construction schedule all need to be lined up before closing, because an improvement exchange is much harder to fix once the transaction is already moving. Bring in your qualified intermediary, CPA, and lender early.
Start Your Texas 1031 With Cedar Top
We help you get set up for your exchange. Remember to involve your CPA, attorney, and tax advisor.