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An improvement exchange: build or renovate with exchange funds.
When the replacement property needs work, exchange funds can pay for it, but only while a titleholder holds the property, and only for work finished by the time you take title.
onezero3one handles improvement exchanges, including the exchange accommodation titleholder arrangement they require. The structure has to be set up before the titleholder acquires the replacement property.
In an ordinary exchange, money spent on improvements after you take title is not part of the exchange. An improvement exchange solves that by having an exchange accommodation titleholder (EAT) hold the replacement property while the work is done with exchange funds. When you take title, what counts as replacement property is the land plus the improvements actually in place at that point.
How it works
- Before the sale or purchase. The exchange agreement and a qualified exchange accommodation arrangement are put in place. The EAT, usually through a single-member LLC, acquires the replacement property, and the arrangement is signed within five business days of that acquisition.
- During construction. Exchange funds pay for the approved work, released against invoices or draw requests. You identify the replacement property, describing the planned improvements in as much detail as is practicable, within 45 days.
- By day 180. The EAT transfers the property, with the improvements completed to that point, to you. The combined time the property is held under the arrangement cannot exceed 180 days.
What counts at the end
- Only improvements in place when you receive the property count as replacement property. Work done after you take title is not like-kind property received in the exchange.
- To defer all the gain, the value you receive, land plus completed improvements, generally needs to equal or exceed what you sold, with all the exchange funds used. Unspent funds are generally taxable.
- The safe harbor does not apply to property you owned at any time in the 180 days before the EAT acquires it (Rev. Proc. 2004-51), so improving property you already own needs a different structure and specific advice.
What to plan for
- A realistic construction schedule: permits and contractor timing decide what is finished by day 180.
- Financing that the lender will extend to the titleholder's entity.
- A budget and draw process agreed before work starts.
- Your tax advisor's view on how any shortfall in value would be taxed.
The guide to reverse and improvement exchanges covers the rules in more depth.
Related
Sources
- Rev. Proc. 2000-37 (safe harbor for parking arrangements) (checked September 30, 2026)
- Rev. Proc. 2004-51 (property owned by the taxpayer within 180 days) (checked September 30, 2026)
- Treas. Reg. §1.1031(k)-1(e) (property to be produced) (checked September 30, 2026)
Planning to build or renovate?
Tell us the property you are selling, the replacement property, the work planned and its budget and schedule. Improvement exchanges are quoted in writing for each transaction.
Discuss an improvement exchange