Build-to-Suit 1031 Exchange: Using Exchange Proceeds to Build or Improve Replacement Property (2026)

A build-to-suit 1031 exchange, also called an improvement exchange, lets you spend exchange proceeds on constructing or improving the replacement property, provided the work is physically in place before the 180-day deadline.

That one clause, “physically in place,” is where most of the trouble lives. The tax code defers gain when you swap real estate held for business or investment for other real estate, and it measures what you got by looking at the property you actually receive on the last day. Money you spend on a half-built garage that is still a slab on day 180 does not show up as value on that date. I will cover the pieces in order: the clock, the structure, identification, what counts, money, a worked example, and the ways it breaks. If you need the base rules on deadlines and boot first, my 1031 exchange rules guide covers them, and I will not repeat them here.

This guide uses U.S. federal rules as of November 2026. State rules, transfer taxes and lender policies vary.

What is a build-to-suit 1031 exchange?

A build-to-suit 1031 exchange is a like-kind exchange where part of your proceeds goes into building or improving the replacement property instead of buying a finished one.

Think of an investor who sells a rental building and wants a new medical office constructed to a tenant’s specification, or one who buys a tired warehouse and needs a new roof, dock doors and a sprinkler system before it is worth what the exchange requires.

The ordinary forward exchange does not allow this. If you buy a finished building and renovate it after closing, the renovation money is your own cash after the exchange. It does not carry your deferred gain. Only value that is part of the property when it is transferred to you in the exchange counts. That is the entire reason an improvement exchange exists: to let the work happen before you take title, so the work becomes part of what you “received.”

The IRS recognizes this structure through a safe harbor in Revenue Procedure 2000-37, which lets a neutral party called an exchange accommodation titleholder hold title while construction is under way. The safe harbor is voluntary. You can structure a longer or different arrangement outside it, but you lose the presumptions the IRS gives you if you follow the procedure’s conditions.

Why must improvements be finished by day 180 to count?

Improvements count only if they are part of the property you actually receive within the exchange period, and the Treasury regulations measure property you receive in the state it is in on the day you receive it. The regulations on exchanges where property is to be produced say this directly in 26 CFR 1.1031(k)-1(e), and Rev. Proc. 2000-37 builds the same logic into its 180-day limit.

Here is the practical translation. Suppose you have 100 percent of your exchange value waiting to be turned into real estate. On day 180, a surveyor could stand on the site and ask what real estate exists. Land plus a finished building counts. Land plus a framed building counts only as land plus a framed building, at its actual value. The undrawn construction funds that were supposed to finish the job are not real estate. They are cash or a receivable, and cash you could have used is boot.

Two clocks run in parallel in a typical improvement exchange:

• The 45-day identification window and 180-day exchange period that start when you close the sale of the relinquished property.
• The 180-day parking limit that starts when the EAT takes title to the replacement property and ends when title must move to you under the safe harbor.

Tax return due dates can cut the exchange period short, so a December sale can end up with less than 180 days if your return deadline lands first and you do not extend. Your intermediary should put the actual dates in writing at the start.

A rule of thumb from watching these deals: plan to finish construction at least 20 to 30 days before day 180. Permit inspections, certificates of occupancy and utility hookups slip. A building that is 95 percent done on day 180 is, for tax purposes, 95 percent of a building, and the missing 5 percent may be enough to create taxable gain if you had no cushion.

Item	Why the deadline matters	Plan
Land acquisition	Must be bought and in the EAT early enough to start building	Close the land purchase in the first few weeks
Permits and approvals	Delays burn calendar days that do not stop	Have entitlements or permits secured before the sale closes
Construction draw schedule	Only work completed by day 180 counts	Back-load nothing; finish structural work first
Certificate of occupancy	Not required by the rule, but lenders and insurers want it	Schedule final inspections with a buffer
Title transfer from EAT to you	Must occur by day 180	Pre-sign the documents and the deed at the end of month five

How does the exchange accommodation titleholder structure work?

In an improvement exchange, a single-purpose entity owned by your exchange company (the EAT) takes title to the replacement property, holds it while the construction is built, and then transfers it to you or to your qualified intermediary within 180 days. For federal tax purposes the EAT is treated as the beneficial owner as long as the conditions in Rev. Proc. 2000-37 are met, so the improvements are being made on property you do not yet own.

The conditions, in plain words, are that:

1. The EAT holds the legal title or similar “qualified indicia of ownership” the entire time.
2. When the property goes into the EAT, you intend it to be replacement property in your exchange.
3. Within five business days of the EAT acquiring title, there is a written agreement saying the EAT is holding the property for your benefit to facilitate the exchange, and everybody agrees to report it that way.
4. Within 45 days of the EAT taking title, the property you will give up is identified, using the usual rules (more on this in the next section if you are in a mixed forward-and-improvement deal).
5. Within 180 days, the property reaches you as replacement property, or the relinquished property is transferred to a buyer.
6. The combined time that the EAT holds the relinquished property and the replacement property does not exceed 180 days.

Section 4.03 of the revenue procedure also lists arrangements that do not break the safe harbor, and it matters for construction work. You can lend to the EAT, you can guarantee its debt, you can lease the property from it, and you can act as the construction manager or contractor for the improvements. That last point is why many build-to-suit exchanges are run by the investor’s own project team, with the EAT just holding title and signing what it must sign.

Your intermediary will usually document this with a package: an exchange accommodation titleholder agreement, a qualified exchange accommodation agreement, a loan agreement for the funds that flow to the EAT, a lease or master-lease if you occupy, and a construction management agreement. Providers describe common patterns in which exchange funds held by the qualified intermediary are loaned to the EAT to pay for the land and the construction, and the loan is extinguished when the EAT transfers the property to you. Ask your provider for their exact flow of funds. I have not seen any two providers draw it identically, and I could not open provider documents for this article, so confirm every detail with your own advisor.

The intermediary side matters too. If you do not know how to pick one, qualified intermediary 1031 exchange fees covers what to compare. For the parking mechanics that overlap with this structure when you buy first, see my reverse 1031 exchange guide. Rev. Proc. 2004-51 matters here as well: the safe harbor does not apply to property you owned within the 180 days before the EAT took title, as explained in Rev. Proc. 2004-51. That is why you cannot build on land you already own and call it a build-to-suit exchange.

How do you identify a building that does not exist yet?

You identify the property in writing within 45 days of the sale closing, using the land’s legal description and as much detail about the planned construction as is practical at that time. The regulations accept that a building not yet built cannot be described like an existing one, so detailed plans and specifications serve as the description.

What you receive has to be “substantially the same” as what you identified, measured in its state on the day it is transferred to you. That phrase gives you some room: you do not have to build an exact copy of draft plans, and a change in paint or fixtures should not matter. A change from a two-story office to a one-story warehouse is the type of deviation that makes people nervous. When you have a real design choice to make, make it before the 45 days end.

The usual identification limits still apply. Three-property rule and 200 percent rule are not suspended because you are building, and a project with several phases can trip the 200 percent test fast. If you plan to identify the land plus a future building on an adjacent parcel, count them carefully. The details are in my guide to the three-property and 200 percent identification rules.

One more point about the 45-day list in a build-to-suit deal: do not leave it vague because you “might” build. Identify the actual parcel with its legal description, state in the identification that construction is planned, and attach the plan summary your architect has at that point. If you can attach a signed construction contract or a GMP price, that helps a reviewer see the project was real.

What improvements count as like-kind, and what does not?

Real property improvements count, and personal property does not. Since the 2017 tax law, only real property qualifies for 1031 treatment, so the building shell, structural and mechanical systems, site work, paving, landscaping that is part of the land, and fixtures that are permanently part of the structure are generally eligible. Furniture, trade fixtures that are removable equipment, vehicles, kitchen equipment, signage that is movable and similar items are personal property and fall outside the exchange.

The line is not always obvious, and that is where a cost segregation study earns its fee. A study separates a building’s components into real property, personal property and land improvements for depreciation, and the same engineering logic can help you decide what to count as exchange value. My guide to cost segregation for commercial real estate explains the method. Be careful about the tax trade-off: personal property that is purchased with exchange funds produces boot, and boot can cause gain recognition and affects depreciation recapture, which I explain in depreciation recapture tax.

Spending item	Typically counts as real property improvement?	Note
Foundation, framing, roof, exterior	Yes	The core of the building
HVAC, plumbing, electrical built into the structure	Generally yes	Permanent building systems
Paving, grading, utilities to the site	Generally yes	Land improvements attached to the real estate
Architect and engineering fees tied to the building	Usually, treated as part of cost	Ask your advisor how your intermediary treats soft costs
Permit and impact fees	Often, as part of cost	Confirm with the provider
Loan interest during construction	Often not	Financing costs are commonly excluded as exchange value
Furniture, equipment, removable trade fixtures	No	Personal property
Moving costs, marketing, tenant gifts	No	Not part of the property

Treat the table as a conversation starter, not an authority. Which soft costs your intermediary will let you pay out of exchange funds is a policy decision as much as a tax one, and I could not verify every provider’s rule.

What does an improvement exchange cost, and who will lend?

A build-to-suit exchange costs noticeably more than a plain forward exchange because of the EAT, the extra legal documentation, possible double closing costs, and builder’s-risk and liability insurance. Exchange companies commonly quote planning ranges from a few thousand dollars up to well over ten thousand for the EAT and documents, with complex projects higher, but these are unverified figures from market descriptions, and your actual quote depends on state, project size and provider.

Cost item	Planning range (unverified)	Who sets it
Qualified intermediary fee for the forward side	Several hundred to a couple thousand dollars	Exchange company
EAT setup and holding fee	Often thousands to low five figures	Exchange company
Legal drafting and review	Varies widely by firm and complexity	Your attorney
Title insurance and recording, possibly twice	Depends on land value and state	Title company, state
Transfer or deed taxes on the EAT-to-you deed	Depends on jurisdiction, can be zero or material	State and county
Builder’s risk and liability insurance	Depends on project cost	Insurer
Lender fees for a construction loan	Often a percentage of the loan	Lender

Financing is the other half of the problem. A conventional lender looks at collateral, and in a typical build-to-suit structure the EAT holds title while the money is being spent. Lenders therefore tend to ask for:

• A guarantee from you, because the EAT is a shell with no income.
• A clear takeout, meaning the construction loan converts or is refinanced when title moves to you.
• A cost-to-complete budget with contingency, since a lender will not fund an unfinished structure.
• Comfort that the EAT agreements are standard, which is easier if the exchange company has done this with that lender before.

Some investors use their own cash for the part of the project that exceeds the exchange funds, some use a construction loan, and some combine the two. Each approach changes the budget math in the example below. Ask your lender for a current written quote rather than relying on a published average, because construction pricing moves with the lender’s view of the project.

Can you show a worked example with real numbers?

Here is a hypothetical, rounded example to show the arithmetic. It is not a real transaction and ignores selling costs, depreciation recapture character, state tax and the netting of debt, which a real exchange handles in more detail.

An investor sells a small apartment building for a net price of $2,400,000. Her adjusted basis is $900,000, so her realized gain is about $1,500,000. She pays off a $700,000 mortgage, leaving $1,700,000 of cash with the qualified intermediary. She buys land for $600,000 through an EAT and plans a $2,000,000 building, financed with the $1,700,000 of exchange cash less the land, plus a new $900,000 construction loan.

Scenario	Value in place by day 180	Compared with $2.4M net price	Likely tax result
A: building finished and deeded to her	$600K land + $2.0M building = $2.6M	Above the price, equity and debt replaced	Full deferral possible
B: building 70% done at day 180	$600K + $1.4M = $2.0M	$400K short	About $400K treated as boot, taxed up to the $1.5M gain
C: only foundation and shell done	$600K + $0.8M = $1.4M	$1.0M short	About $1.0M boot; most of the deferral is lost
D: she buys a finished $2.4M building instead	$2.4M	Matches	Full deferral, no EAT fees

The point of scenario B is that nothing went “wrong” in the construction. The builder was merely late. The tax code does not grade effort; it measures what exists on day 180. Scenario D is the honest alternative that many investors skip over. If a finished building meets your needs, you may be able to buy it, renovate with your own cash after closing, and save the fees and the risk.

What makes these construction exchanges fail?

Four failures account for most of the damage: construction that runs late, not enough replacement value, related-party problems, and sloppy paperwork. None of them is exotic.

Construction delays. Here is a composite example, not a real client. An investor identifies a lot for a small retail building with a tenant lined up. Permits take longer than planned, a utility connection waits on the municipality, and the framing crew finishes the shell around day 150. On day 180 the building has walls and a roof but no interior finish. She takes title to what exists, which is far less than the value she needed. The exchange does not fail completely, but the gap becomes boot and she pays tax on it. The fix would have been to start permitting before selling the old property and to set a “pull-the-plug” date, such as day 120, when she decides whether to reduce scope so it can finish in time.

Not enough basis or value. To defer all the gain you generally have to acquire replacement property worth at least the net sale price and reinvest all the net equity. In an improvement exchange, the replacement value is what is built by day 180 plus the land. If your budget is tight and costs rise, you can fall short on both fronts. Add a contingency to the replacement budget, and consider designing the project with a “must-have” scope that finishes early and a “nice-to-have” scope that can wait until after you own it.

Related-party problems. The EAT cannot be you or a disqualified person, and you cannot use the EAT to launder a transaction with a relative. If you buy the land from a related party, the rules for related-party exchanges, including a two-year holding requirement, may apply. A related contractor is not automatically disqualified, but the price and payment trail should look like an arm’s-length deal. Ask your advisor before you sign with a cousin’s construction company.

Documentation and timing slips. The written agreement within five business days, the 45-day identification and the title transfer by day 180 are all mechanical. A missed signature is a self-inflicted failure. Ask your intermediary for a dated checklist and calendar every date on your own calendar as well.

Also worth knowing: the risk allocation during construction is real. The EAT usually requires that you bear economic risk, and insurers will want clear named-insured language. If a fire or a contractor default occurs while the EAT holds title, the tax treatment and the insurance recovery both depend on documents that were signed before the problem.

What should you ask your intermediary before you start?

Before you sign anything, ask your intermediary and your advisors the questions below. If a provider cannot answer them in writing, that tells you something.

1. Do you run improvement exchanges regularly, and how many have you closed in the last two years?
2. What is your total fee schedule for an EAT, including holding fees, extensions and termination?
3. How do the exchange funds flow to the EAT and to the contractor? Can I see a sample loan and construction agreement?
4. What is your policy on soft costs, such as architect fees, permits and construction interest, paid from exchange funds?
5. Which lenders have funded deals with you, and what do they typically require in the loan documents?
6. Who is the owner and manager of the EAT entity, and is it a qualified party under your policy?
7. What happens if the building is not finished by day 180? What are my options and what do they cost?
8. Who insures the property while the EAT holds title, and how is the EAT named?
9. How will you document that the property I receive is substantially the same as what I identified?
10. What dates do you calculate for each deadline, including the tax return due date effect?

Then create a project schedule that works backward from day 180: closing the land purchase, permits, mobilization, structural completion, mechanical rough-ins, interior finish and inspections, with a deed to you scheduled before the final week. Share that schedule with your intermediary and your builder, and have both sign off on it.

For broader context on where an improvement exchange fits alongside other structures, my guide to deferring gain on investment real estate lays out the options and where an improvement exchange fits among them. For the IRS’s overview of exchanges, see the agency’s page on like-kind exchanges under section 1031.

This article is general information, not tax, legal or financial advice. Cost ranges are unverified planning figures, the worked example is hypothetical, and I could not open every primary source for this update, so verify the revenue procedures and regulations cited with a qualified tax advisor, attorney and exchange company before acting. Information is current as of November 2026.