An improvement exchange (also known as a construction or build-to-suit exchange) allows an exchanger to use exchange funds to make improvements on the replacement property before taking title. This powerful strategy lets you customize your replacement property to meet your exact investment needs.
How It Works
In a standard exchange, you simply purchase an existing property. In an improvement exchange, the Qualified Intermediary acquires the replacement property (or an Exchange Accommodation Titleholder takes title), and improvements are made using exchange funds before the property is transferred to the exchanger.
The Exchange Accommodation Titleholder
An Exchange Accommodation Titleholder (EAT) holds title to the property while improvements are being made. The EAT is typically a single-purpose LLC controlled by the Qualified Intermediary. This structure allows construction to proceed while keeping the exchange compliant with IRS requirements.
Timeline Considerations
All improvements must be completed within the 180-day exchange period. This means careful planning and coordination with contractors is essential. Any improvements not completed within the 180-day window will not count toward the exchange value.
Value Requirements
The total value of the replacement property (land plus improvements) must equal or exceed the value of the relinquished property to achieve full tax deferral. Only improvements completed within the exchange period count toward this value.
Common Uses
Improvement exchanges are commonly used when an exchanger wants to purchase land and build a new structure, renovate an existing building, or add significant improvements to increase a property’s value to match the relinquished property’s sale price.