Sometimes the ideal replacement property does not exist yet in finished form; it needs a renovation, an expansion, or ground-up construction to be worth what the exchanger is trying to reinvest. An improvement exchange, also called a build-to-suit or construction exchange, allows exchange funds to pay for that work, but only inside the same 180-day window that governs every other exchange, which makes timing the constraint that decides whether this structure is realistic for a given project. It is also one of the more misunderstood exchange structures, since the mechanics resemble a normal purchase from the outside while the underlying legal ownership works quite differently for the duration of the project.
How an Improvement Exchange Is Structured
Because the exchanger cannot hold title to the replacement property while exchange funds are still being spent on it, an exchange accommodation titleholder, the same type of entity used in a reverse exchange, takes and holds title to the replacement property during construction. Exchange proceeds pay contractors and suppliers through this entity rather than directly through the exchanger, and improvements have to be completed, or at least the intended value has to be in place, before title transfers to the exchanger at the end of the exchange period. The exchanger typically manages the project day to day, but the accommodation structure is what keeps the arrangement inside the exchange rules. Draws against exchange funds generally need to route through the accommodation titleholder rather than being paid directly by the exchanger to a contractor, which means the payment process on an improvement exchange looks more like a construction loan draw schedule than a typical renovation paid out of pocket.
The 180-Day Deadline Does Not Move for Construction
This is the single most common reason an improvement exchange fails to deliver the value an exchanger expected: construction, permitting, and inspections in Detroit and the surrounding counties routinely take longer than 180 days, and the deadline for completing the exchange does not extend for a slow permit office or a weather delay. Whatever improvement value is actually in place by day 180 is what counts toward the exchange; unfinished work beyond that point does not add exchange value even if the exchanger intends to keep building afterward, and it does not disqualify the exchange, but it does mean the reinvestment credited is lower than planned. Building a contingency into the construction budget and schedule, rather than assuming every trade finishes on the optimistic date, is what keeps a permitting delay from quietly shrinking the deferral the exchanger was counting on.
What This Structure Fits Well
An improvement exchange suits a scenario where the exchanger already controls or has identified a specific property that needs targeted work to reach full value, a tenant build-out on an industrial building to secure a signed lease, or a value-add renovation on a multifamily property with a realistic construction timeline well under 180 days. It fits poorly for ground-up development on raw land, where entitlement and construction timelines routinely run well past the exchange window, unless the project is already substantially permitted and ready to break ground at the start of the exchange period. In and around Detroit, this makes the structure a better match for an interior renovation, a roof or mechanical replacement, or a code-driven upgrade to an existing building than for a project still working through zoning or site-plan approval.
Coordinating the Timeline Before Committing
Because the improvement has to happen inside the same window as the identification and closing deadlines, the realistic construction schedule needs to be built and reviewed with the contractor, the accommodation titleholder, and the qualified intermediary before the exchanger commits exchange funds to the project. A schedule that only works if every permit, inspection, and subcontractor stays on time is not a schedule; treating the 180-day deadline as the outer edge of a buffer, rather than the target completion date, is what keeps a construction delay from becoming a partially failed exchange.
Common 1031 Exchange Questions
Can I use exchange funds to renovate a replacement property?
Yes, through an improvement exchange, where an exchange accommodation titleholder holds the property while exchange proceeds pay for construction, and title transfers to the exchanger once the exchange period ends.
Does the 180-day deadline extend if construction is not finished?
No, only the improvement value actually completed by day 180 counts toward the exchange. The deadline does not move for permitting delays, weather, or contractor scheduling.
What happens to unfinished work after the exchange closes?
The exchanger can continue and pay for the remaining work after taking title, but that additional value no longer counts as part of the tax-deferred exchange.
Is an improvement exchange a good fit for ground-up development?
Rarely, unless the project is already permitted and ready to start construction immediately, since entitlement and build timelines for new construction generally exceed the 180-day window.
Who holds title to the property while it is being improved?
An exchange accommodation titleholder set up by the qualified intermediary holds legal title during construction, with title transferring to the exchanger when the exchange period concludes.
