How to Start an Improvement (Build-to-Suit) 1031 Exchange

An Improvement 1031 Exchange — also known as a Build-to-Suit or Construction Exchange — is one of the most flexible but complex strategies under Section 1031. It allows investors to not only acquire a replacement property but also use exchange funds to make improvements or even new construction, all while deferring capital gains taxes.

Because of its complexity, starting an Improvement Exchange requires careful planning, legal structuring, and the right team of professionals. Below is a step-by-step guide to help you begin the process.

Step 1: Consult Your Legal and Tax Advisors

Improvement Exchanges are far more complicated than standard 1031 transactions. Before starting, investors should:

• Review the strategy with experienced legal, financial, and tax advisors.

• Confirm that improvements and ownership structures meet IRS requirements.

• Discuss potential pitfalls such as lender restrictions, title issues, and strict 180-day deadlines.

Tip: Not all advisors are familiar with Build-to-Suit structures. Make sure yours have specific 1031 experience.

Step 2: Coordinate With a Qualified Intermediary (QI) and Exchange Accommodation Titleholder (EAT)

Because investors cannot hold legal title to the replacement property while improvements are underway, an Exchange Accommodation Titleholder (EAT) steps in to “park” the property temporarily.

At this stage, your EAT (such as Exeter Reverse 1031 Exchange Services, LLC):

• Reviews title, financing, and closing logistics.

• Flags any administrative issues that may interfere with exchange compliance.

• Ensures lender participation and understanding of the Build-to-Suit process.

Step 3: Gather Information and Provide Due Diligence Documents

Your EAT and QI will need detailed information to set up the exchange. Be prepared to provide:

• Investor information: legal name(s), taxpayer ID, contact details, and (if applicable) entity details like authorized signers.

• Property details: street address, legal description, and/or Assessor’s Parcel Number (APN) for both relinquished and replacement properties.

• Entity requirements: replacement property must typically be acquired in the same legal name as the relinquished property. If not, flag this early for review.

• Lender details: contact information for your lender, plus a joint call to align on the Build-to-Suit structure.

• Deed: copy of the deed from when you acquired the relinquished property.

• Environmental requirements: completed Environmental Site Assessment Questionnaire for the replacement property.

Note: Some property types may be exempt from the environmental report requirement — confirm with your EAT.

Step 4: Exchange Agreements and Legal Structures

Your EAT will prepare the legal framework necessary for the exchange, which typically includes:

• A new single-member LLC (SMLLC) to act as the Special Purpose Entity (SPE) that holds (or “parks”) title to the replacement property during the exchange.

• A Qualified Exchange Accommodation Agreement (QEAA) that defines the parking arrangement.

• Coordination with escrow/closing agents to ensure exchange compliance.

Step 5: Provide Transactional Documents for Closing

For the exchange to move forward, your EAT will request:

• Purchase and Sale Agreements for both relinquished and replacement properties.

• Preliminary Title Reports or Commitments for both properties.

• Escrow Instructions (if applicable).

• Insurance Binder: property and liability insurance listing the SPE as the insured and the EAT as additional insured.

• Phase I Environmental Site Assessment: required for most commercial, agricultural, industrial, and large multifamily properties.

Step 6: Understand Fees and Costs

Improvement Exchanges involve more moving parts than standard 1031s. Costs typically include:

• Formation and administration of the LLC/SPE.

• Legal documentation and structuring.

• EAT and QI service fees.

• Environmental and due diligence reports.

All fees and costs are generally invoiced through escrow and due at the closing of the replacement property.

Why These Steps Matter

Starting an Improvement Exchange is not just about paperwork — it’s about risk management and compliance. Missing a required document, failing to notify your lender, or overlooking environmental requirements can jeopardize the entire exchange and trigger a taxable event.

By approaching the process in a structured way and working with experienced professionals, investors can confidently leverage this strategy to:

• Defer significant tax liability.

• Customize or build properties to fit long-term investment goals.

• Maximize the use of exchange funds by applying them to both acquisition and improvements.

Launching an Improvement (Build-to-Suit) 1031 Exchange requires more preparation and coordination than a traditional 1031. But for investors looking to transform a property into a better fit for their portfolio — whether through renovation, expansion, or new construction — the payoff can be substantial.

The key is preparation: line up your advisors, gather documents early, and work closely with your Qualified Intermediary and EAT. With the right structure in place, you can successfully execute a tax-deferred exchange while enhancing the long-term value of your investment.