Improvement Exchange Planning

An improvement exchange lets a taxpayer use exchange funds to add value to a replacement property through construction or renovation, with the improved value counting toward the exchange as long as the work is completed and the funds spent before the 180-day period ends. It is a common fit for a New York City exchanger buying an underbuilt outer-borough industrial site or a building that needs capital work to reach the value of the relinquished property. The structural difference from a standard purchase is that title sits with an exchange accommodation titleholder, not the taxpayer, until the improvements are done and the titleholder conveys the property to close out the exchange.

How an Improvement Exchange Holds Title

The exchange accommodation titleholder is a separate entity, typically set up by the qualified intermediary, that takes and holds title to the replacement property while construction proceeds. The taxpayer directs the improvements and the QI disburses exchange funds for the work, but legal ownership does not transfer to the taxpayer until the titleholder conveys the property, which has to happen inside the 180-day window along with everything else. This structure is what allows construction costs to count as part of the exchange value in the first place; a taxpayer who takes title directly and then improves the property afterward cannot fold those improvement costs into the exchange.

The 180-Day Clock Doesn't Pause for Construction

Permitting delays, a slow contractor, or a change order do not extend the exchange period. Any improvements not actually completed and paid for by day 180 do not count toward the replacement value, and any exchange funds still sitting unspent at that point are generally treated as boot. For New York City projects, where permitting and inspection timelines through the Department of Buildings can run longer than a comparable project elsewhere, we build the construction schedule with real contingency against the exchange deadline rather than against the contractor's optimistic estimate.

Budgeting Improvement Dollars Inside the Exchange

We build a draw schedule that ties construction spending to the exchange calendar rather than only to the project's own milestones, so unspent-funds risk is visible well before day 150.

Total improvement budget versus exchange equity available for construction
Draw schedule mapped to the 180-day deadline, with contingency for permitting delay
Contractor payment terms confirmed against the titleholder's disbursement process
Change-order buffer held back from the initial draw allocation
Projected completion date checked against the deadline with at least two weeks of margin

Where Improvement Exchanges Fit in Outer-Borough Industrial

Older industrial stock in Sunset Park, Maspeth, or Hunts Point often trades below the value of a comparable relinquished asset specifically because it needs work: added clear height, upgraded loading, or new electrical service for a modern logistics tenant. An improvement exchange lets a buyer close on that discounted building and use exchange funds to bring it up to the target value, rather than searching for an already-improved building at a matching price point in a tighter window. It is a sourcing advantage in a market where fully improved industrial product is scarce and often priced at a premium.

Completion Risk and the Titleholder Handback

The construction does not have to be entirely finished by day 180, but the funds have to be spent and the improvements in place to the extent they will count toward exchange value; work started but not completed generally only counts for the portion actually built and paid for. We treat the final 30 days of the exchange period as a hard planning boundary, confirming with the contractor and the titleholder well in advance that the handback and conveyance can happen cleanly before the deadline rather than becoming a last-week scramble.

Common 1031 Exchange Questions

Who holds title during an improvement exchange?

An exchange accommodation titleholder, a separate entity typically established by the qualified intermediary, holds title while construction is underway. Title conveys to the taxpayer once the improvements are complete and the exchange is ready to close, all within the 180-day period.

What happens if construction isn't finished by day 180?

Only the improvements actually completed and paid for by the deadline count toward the exchange value. Unspent exchange funds at that point are generally treated as boot, and the taxpayer may end up with a smaller deferred gain than planned if the project runs behind schedule.

Can an improvement exchange be used on a building that already has a tenant in place?

Yes, though construction work around an existing tenant needs its own timeline consideration, since tenant coordination can add delay that a vacant building would not carry. We factor occupancy status into the draw schedule and completion planning from the start.

Does permitting delay count as an excuse for missing the 180-day deadline?

No. There is no extension for permitting or construction delay outside of federally declared disaster relief situations. This is why we build meaningful contingency into the construction schedule from the outset rather than planning to the fastest possible timeline.

Can the taxpayer act as the general contractor on an improvement exchange?

Yes, but disbursement of funds still has to run through the exchange accommodation titleholder rather than directly to the taxpayer, and clear recordkeeping on labor and materials becomes even more important when the taxpayer is self-performing work instead of paying a single outside contractor. We recommend applying the same draw-schedule discipline to self-performed work as to a third-party contractor relationship.