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Improvement Build to Suit Exchange
How improvement exchanges let investors direct exchange funds toward construction on the replacement property.
What This Includes
An improvement exchange, sometimes called a build to suit exchange, allows an investor to use exchange funds not only to purchase a replacement property but also to fund construction or improvements on that property before it is transferred to the investor. This structure is useful when the available replacement property is worth less than the relinquished property being sold, or when the investor wants a property built out to a specific use before taking title.
Like a reverse exchange, an improvement exchange relies on an Exchange Accommodation Titleholder to hold title to the replacement property under the safe harbor in Revenue Procedure 2000-37. While the EAT holds title, exchange funds are used to fund construction, renovation, or improvement work on the property. The value of those improvements, as completed by the time the property is transferred to the investor, counts toward satisfying the requirement that the replacement property be equal to or greater in value than the relinquished property.
The improvement work must be substantially completed within the same one hundred eighty day exchange period that applies to any 1031 exchange, because the property must transfer from the EAT to the investor within that window for the exchange to be valid. This makes timeline coordination critical. Construction that runs past the one hundred eighty day deadline generally cannot use exchange funds for the remaining work, and any improvements not completed and reflected in value by the transfer date do not count toward the exchange.
Because of the tight construction window, improvement exchanges work best for smaller, well-scoped renovation projects or minor build outs rather than ground up construction, unless the project can realistically be completed within one hundred eighty days. We help Albuquerque, NM investors evaluate whether a proposed improvement scope fits within the exchange period, coordinate with the EAT and contractors on a realistic schedule, and track the completed improvement value against the exchange requirements.
What We Deliver
- Evaluation of whether a proposed improvement scope fits within the one hundred eighty day exchange period
- Coordination with an Exchange Accommodation Titleholder to hold title during construction
- Coordination of exchange fund disbursement to contractors and vendors
- Tracking of completed improvement value against exchange requirements
- Scheduling coordination between the EAT, contractors, and the exchange deadline
- Documentation support for the qualified exchange accommodation agreement
- Planning support for transferring title from the EAT to the investor once work is complete
- Coordination with tax advisors on the treatment of completed versus unfinished improvements
Common Situations
FAQs about Improvement Build to Suit Exchange
Can exchange funds be used for construction on the replacement property?
Yes, through an improvement exchange structure. An Exchange Accommodation Titleholder holds title to the replacement property while exchange funds are used to fund construction or improvements, and the completed value counts toward the exchange once the property transfers to the investor. We help Albuquerque, NM investors set up this structure.
Is there a deadline for completing the improvements?
Yes. The improvement work must be substantially completed and the property transferred from the Exchange Accommodation Titleholder to the investor within the same one hundred eighty day exchange period that applies to every 1031 exchange. Work completed after that deadline generally cannot use exchange funds. We help Albuquerque, NM investors plan realistic construction timelines.
What kind of projects work best for an improvement exchange?
Smaller, well-scoped renovation or build out projects tend to work best, since they can realistically be completed within one hundred eighty days. Ground up construction is possible but risky given the fixed deadline. We help Albuquerque, NM investors evaluate whether a proposed project scope is realistic for the exchange period.
Do unfinished improvements still count toward the exchange value?
Generally, only the value of improvements actually completed and reflected in the property's value at the time of transfer to the investor counts toward the exchange. Planned but unfinished work does not count. We help Albuquerque, NM investors track completed value against the exchange requirements as construction progresses.
Who manages the property while the Exchange Accommodation Titleholder holds title?
The Exchange Accommodation Titleholder holds legal title, but the investor and the investor's contractors typically manage the construction process under agreements set up as part of the exchange structure. We help Albuquerque, NM investors coordinate this relationship with the EAT.
Why would an investor use an improvement exchange instead of buying the property as is?
An improvement exchange lets an investor apply exchange funds toward bringing a lower priced or undervalued property up to the value needed to fully defer gain, or toward customizing a property for a specific intended use before taking title. We help Albuquerque, NM investors evaluate whether this approach fits their replacement property goals.
Compliance and Limits
Educational content only. Not tax, legal, or investment advice. Improvement exchanges rely on the safe harbor structure described in Revenue Procedure 2000-37 under Internal Revenue Code Section 1031. New Mexico imposes a graduated state income tax on capital gains that are not deferred through a qualifying exchange. Consult with a Qualified Intermediary and a qualified tax advisor before making exchange decisions.
Next Step
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