Can 1031 Funds Be Used for Improvements? – Don’t Make This Mistake + FAQs

Confused about whether you can use 1031 exchange funds for property improvements? You’re not alone. Every year, thousands of real estate investors wonder if they can channel their 1031 exchange proceeds into renovating or building on a new property.

Like-kind exchanges (under IRS Section 1031) deferred nearly $10 billion in taxes for investors in 2019 alone – yet few realize those tax-deferred dollars can also finance property upgrades under the right conditions.

Yes, You Can Use 1031 Funds for Improvements — Here’s the Catch

Under U.S. federal tax law, Section 1031 exchanges allow you to defer capital gains tax when you sell an investment property and reinvest the proceeds in another like-kind property of equal or greater value. The twist is that these exchange funds can be used for improvements or construction on the replacement property only if the improvements are made as part of the exchange. In simple terms: Yes, 1031 funds can fund property improvements, but you must follow strict rules so those improvements count toward your tax-deferred exchange. If you simply pocket the cash and renovate later, you’ll trigger taxes.

Let’s break it down:

Federal Law: How Section 1031 Allows Improvement Exchanges

Under federal law, once you complete the purchase of your replacement property in a 1031 exchange, the transaction is considered closed. Any leftover exchange money you spend on improvements after taking title is treated as taxable boot (taxable cash or non-like-kind property received). The IRS doesn’t let you defer tax on funds used for post-closing repairs or renovations – those would count as if you received cash and then spent it, which voids the deferral on that portion. In other words, the improvements have to be made during the exchange, not after it’s over.

How do you do that? The key is something called a 1031 improvement exchange (also known as a construction or build-to-suit exchange). This is a special exchange structure where a third-party entity holds title to the replacement property temporarily and uses your exchange proceeds to make improvements before you officially receive the property. All improvements must be completed (or at least in progress and substantially done) by the time your 180-day exchange period ends. If structured properly, the value of the land + improvements is treated as your replacement property purchase price for 1031 purposes. This allows you to roll all your sale proceeds into both acquiring the property and upgrading it, tax-deferred.

To summarize the federal rules enabling improvements with 1031 funds:

• Like-Kind Requirement: Under the Tax Cuts and Jobs Act of 2017, only real property qualifies. Improvements attached to real property count as real property. So, building a structure or adding permanent upgrades is fine – as long as they are part of the real estate when you take ownership.
• No Constructive Receipt: You cannot receive or control the cash directly. A Qualified Intermediary (QI) must hold the money from your sale. If you want that money to fund improvements, it can’t come to you first. Instead, it goes from the QI into the new property construction or renovation via a third-party titleholder.
• 45-Day Identification: You must identify the replacement property including the intended improvements (for example, “123 Main Street plus $300,000 of renovations”) within 45 days after selling your old property. The IRS needs to know what property (as improved) you’re acquiring.
• 180-Day Completion Window: You have 180 days from the sale to complete the exchange. Any improvements you want counted must be done by the time you receive the property (which must be by day 180). You don’t necessarily have to finish every nail and coat of paint, but the value of work completed by that deadline is what counts toward your exchange. Anything not done by then means some funds weren’t used for like-kind property, and those become taxable.
• Exchange Accommodation Titleholder: Typically, a specialized third-party entity (often an LLC created by your QI known as an Exchange Accommodation Titleholder (EAT)) will temporarily take title to the replacement property. The EAT holds it while construction crews do the approved improvements using the exchange funds. Once the work (or as much as needed) is done within the 180 days, the EAT transfers the improved property to you, completing the exchange.

This structure is blessed by IRS safe harbor guidelines (Revenue Procedure 2000-37), which explicitly allow “parking” a property with an intermediary for up to 180 days to facilitate improvements or reverse exchanges. As long as you adhere to the timeline and don’t try to take possession of the money yourself, using 1031 funds for improvements is 100% legal under federal law.

State Nuances: Extra Tax Rules You Need to Know

Real estate is local, and so are some tax rules. Most states follow the federal treatment of 1031 exchanges for their own state income taxes – meaning if your exchange qualifies federally, your state also lets you defer the state capital gains tax. However, there are important nuances when your exchange crosses state lines or involves certain state-specific regulations:

• State-to-State Exchanges: You can sell a property in one state and buy in another using a 1031 exchange; federal law allows it. But a few states want to ensure they don’t lose tax revenue when capital gains “leave” the state. For example, California requires sellers who exchange out-of-state to file an information return (California’s “claw-back” provision) so if you ever cash out, California can claim the deferred state tax. Georgia, Colorado, Hawaii and some others require a percentage of the sale to be withheld at closing (e.g. 3–5%) unless you certify it’s a 1031 going into another property.
• Indiana’s Quirk: As a rare exception, Indiana historically did not fully recognize delayed 1031 exchanges for state tax unless it was a simultaneous swap. In practice, this meant they might withhold state tax upfront on an exchange, then require you to prove the exchange to get a refund or credit. Always check current state rules or consult a CPA if doing an exchange involving Indiana or any unusual state requirement.
• Transfer Taxes & Titling: Improvement exchanges involve transferring property twice (seller to EAT, then EAT to you). In some states, that could trigger double transfer taxes. Many states have exemptions if it’s part of a 1031 exchange. For instance, Florida has clarified that the intermediate transfer via an EAT in a 1031 is not subject to double documentary stamp tax. Still, in any state, work with your exchange accommodator and title company to minimize extra transfer fees when the property changes hands twice.
• Property Tax Considerations: Using an EAT to hold title might have short-term implications (like who gets the property tax bill during construction). Generally, this is a minor issue as the EAT is often a disregarded entity for tax purposes and you’re effectively the owner for economic benefits. But be prepared for some paperwork so that property taxes or other local taxes are prorated correctly when the dust settles.
• Local Permitting Timing: One often overlooked “state/local” nuance is permitting and construction timelines. If your replacement property is in a jurisdiction with slow permitting or strict building codes, it could affect how much you can get done in 180 days. That’s not a tax law issue per se, but a local reality that can impact your exchange. Savvy investors sometimes choose improvements that can be completed quickly or even negotiate with the seller to start certain improvements before closing (when possible) to meet the deadlines.

In short, the federal law sets the blueprint that yes, 1031 funds can be used for improvements via a proper exchange structure. State laws generally play along with the tax deferral, but be mindful of state-specific withholding, forms, and any extra taxes or regulations when your exchange spans different states or involves multiple title transfers. Always consult with a qualified intermediary or tax advisor who understands your state’s rules before diving into an improvement exchange.

🚫 What to Avoid When Using 1031 Funds for Improvements

Using 1031 exchange proceeds for improvements can be a powerful strategy, but there are plenty of pitfalls that could derail your tax deferral if you’re not careful. Here are the top mistakes to avoid:

• 🚫 Taking the Cash or Paying Contractors Directly: The moment you or your entity directly receives the sale proceeds, even if your intention is to spend it on the new property’s renovation, that money becomes taxable. To keep your exchange intact, never take possession of the funds. They must go through a Qualified Intermediary at all times. Similarly, don’t pay contractors yourself from those funds unless it’s through the proper exchange account or via the EAT. Any payment that isn’t handled by the intermediary/EAT could be seen as you receiving boot.
• 🚫 Missing the 45-Day / 180-Day Deadlines: Timing is everything in a 1031 exchange, especially one involving improvements. Failing to identify the replacement property (with improvements) by day 45 or to complete the acquisition by day 180 will disqualify the exchange. Mark these dates on your calendar in red. If the project is complex, build in buffers – delays in construction or closing can happen. If you can’t finish critical improvements in time, be prepared to accept that some funds will become taxable. (Pro tip: If day 180 falls after your tax return is due, file for an extension to get the full 180 days.)
• 🚫 Trying to Improve a Property You Already Own: This is a common misconception. Investors think, “I already have a piece of land, I’ll just use my 1031 proceeds to build on it.” Unfortunately, you cannot 1031 into a property you already own. If title is already in your name or a related entity, it doesn’t qualify as “like-kind replacement” because you didn’t acquire it through the exchange. There is a workaround (involving transferring that property to an EAT first, then using exchange funds to improve it and then taking it back as the replacement property), but this is highly complex. Don’t attempt this without expert guidance, because it’s rife with ways to go wrong.
• 🚫 Counting Uninstalled Materials or Unperformed Work: Let’s say you want to use exchange funds to install solar panels or a new HVAC system. You order the equipment before the 180-day deadline, but it’s sitting in boxes on site when the exchange period ends. That equipment is not yet part of the real property – it’s just personal property until installed. The IRS would treat the money spent on it as if you bought personal property (not like-kind) and thus it’s taxable boot. Likewise, pre-paying a contractor for work that will happen later doesn’t count. Only improvements actually in place (affixed) by the time you take title are considered part of the real estate. So avoid paying for materials or services that won’t be completed in time. For that matter, focus on true capital improvements (value-adding upgrades); routine repairs or maintenance won’t increase the replacement property’s basis for exchange purposes.
• 🚫 Choosing the Wrong Team: An improvement exchange is not a DIY project. Avoid using a regular escrow agent or attorney who isn’t well-versed in 1031s as your intermediary or EAT holder. And make sure your contractor understands the timeline – if they cause delays, you face the tax consequences. Surround yourself with 1031-savvy professionals: a Qualified Intermediary company experienced in build-to-suit exchanges, a tax advisor/CPA who has handled them, and possibly a real estate attorney to navigate any local issues. Skimping on expert help is a mistake that can cost far more in taxes later if something goes awry.
• 🚫 Ignoring Value and Equity Requirements: Remember that to defer all your taxes, you need to end up with no cash left over and equal or greater debt on the new property (if you had debt on the old one). If you use a chunk of your sale proceeds on improvements but the total value of the new property (purchase price + improvements) still ends up lower than what you sold the old property for, the difference may be taxable. For example, sell for $1M, and you buy a fixer-upper for $700k and put $200k of improvements = $900k total. You’re $100k short – that $100k will be taxable unless you find additional like-kind investments for it. Avoid under-investing; if the replacement with improvements is less, arrange to acquire additional property or consider investing the excess into something like a tenancy-in-common interest that qualifies.

Avoiding these pitfalls will help ensure your 1031-funded improvement project goes smoothly. The mantra is: plan ahead, follow the rules, and don’t cut corners. With proper planning, you can successfully upgrade your next investment property using tax-deferred dollars and avoid a nasty tax surprise.

🔑 Key Terms Explained Simply

Navigating a 1031 exchange with improvements introduces some jargon. Let’s decode the key terms in plain English:

• 1031 Exchange (Like-Kind Exchange): A tax-deferral transaction under IRS Code Section 1031 where you sell investment real estate and buy other investment real estate, deferring capital gains tax. Example: Sell a rental house, buy an office building, no tax paid now.
• Exchange Proceeds (1031 Funds): The money from selling your old property, which must be held by a middleman (QI) and then used to acquire your new property (and pay for any improvements as arranged). You never touch this money directly during the process.
• Qualified Intermediary (QI): A neutral third party required in a delayed 1031 exchange. The QI holds your sale proceeds and facilitates the purchase of the replacement property (and can fund improvements through the EAT). They prevent you from having constructive receipt of funds. Think of them as the escrow agent for your exchange, making sure IRS rules are followed.
• Exchange Accommodation Titleholder (EAT): An entity that temporarily holds title to a property during an exchange. In improvement exchanges, the EAT (often an LLC created by the intermediary) buys and holds the replacement property while improvements are made. After construction, the property is transferred to you. This structure is authorized by IRS guidelines to enable complex exchanges like build-to-suit and reverse exchanges.
• Relinquished Property: The property you are selling in the exchange (the one you let go of, hence relinquished). This is your old investment that kicks off the 1031 exchange.
• Replacement Property: The property you are buying in the exchange (the new acquisition). In an improvement exchange, the replacement property includes the land and the new improvements being added to it.
• Boot: Any value you receive from the exchange that is not like-kind real estate. Boot typically takes the form of cash you get to keep or debt relief. If your exchange isn’t equalized (for instance, you sell for $500k but only invest $400k into the new deal), the $100k difference is boot and will be taxable. Using exchange funds for non-qualifying purposes (like taking a cash payout or paying for non-real property items) also creates boot.
• Build-to-Suit / Construction Exchange: Alternate names for an improvement exchange. “Build-to-suit” highlights that you can essentially have the replacement property built or renovated to your specifications using the exchange. It’s the same concept of structuring a 1031 to include construction.
• Like-Kind Property: In real estate, almost any real property is like-kind to any other real property, as far as 1031 is concerned. An apartment building can be exchanged for raw land, a warehouse for a shopping center, etc. Quality or use doesn’t matter – it’s the nature (real estate) that matters. Improvements become part of the real property once attached, so building a new structure or improving a fixer-upper keeps it all in the realm of real estate. (Personal property like equipment, or interests like stocks, do not qualify as like-kind to real estate.)
• Identification Period (45-Day Rule): After selling your relinquished property, you have 45 days to formally identify potential replacement properties in writing. For an improvement exchange, you should identify the property and note that it will include improvements (possibly even specifying what the improvements will be, especially if they change the property’s nature or value significantly).
• Exchange Period (180-Day Rule): The total time you have from the sale of the relinquished property to complete the purchase of the replacement property (and finish qualified improvements) in order to get full tax deferral. This period is a maximum of 180 days. Important note: If your tax return is due before the 180 days is up, you must close the exchange by then or file for an extension to get the full time.
• Reverse Exchange: An advanced type of exchange where you acquire the replacement property before you sell the old one. The IRS doesn’t let you own both at the same time during an exchange, so again an EAT steps in to hold one of them (commonly the new property) until the old is sold. Reverse exchanges can be combined with improvements – for instance, you might have an EAT buy a new property, build a structure on it, and later when your old property sells, transfer the new improved property to you as the exchange outcome. The timeline is still max 180 days.
• Capital Gains Tax & Depreciation Recapture: The taxes due when you sell an investment property at a profit. Long-term capital gains rates (15% or 20% federally) apply to your appreciation, and depreciation recapture (25% federally) applies to the portion of gain attributable to depreciation you claimed. A 1031 exchange defers both of these taxes – you don’t pay them in the year of sale if you successfully exchange. That’s why using a 1031 for improvements is so powerful: you reinvest pre-tax dollars into upgrading your portfolio, instead of losing a chunk to taxes.

By understanding these terms, you demystify the process. Essentially, a 1031 improvement exchange means orchestrating a delayed exchange with the help of a QI and possibly an EAT, so that your sale proceeds go directly into a new property and its upgrades, rather than into your pocket.

Real-World Examples: Using 1031 Proceeds to Renovate or Build

To truly grasp how using 1031 funds for improvements works, let’s look at a few real-world style examples. These scenarios illustrate what can be done – and what not to do – when reinvesting exchange proceeds into property upgrades.

Example 1: From Fixer-Upper to Fabulous – The Perfect Improvement Exchange

Scenario: Alice sells a small apartment building for $1.2 million. Her goal is to exchange into a rundown 12-unit residential property listed at $900,000 and use the remaining $300,000 to renovate the units and add a new laundry facility.

Plan: Alice engages a Qualified Intermediary to handle the exchange. Within 45 days of her sale, she identifies as her replacement: “123 Oak Street, a 12-unit apartment, plus interior renovations and a laundry room addition (approximately $300k in improvements).” The QI sets up an LLC (as an EAT) which purchases 123 Oak Street for $900k using Alice’s exchange funds. Now the EAT owns the property on Alice’s behalf. Over the next 4 months, contractors (hired by Alice, but paid via the QI/EAT from the exchange account) renovate all 12 units (new flooring, kitchens, etc.) and construct a laundry room building on the property. By day 150, about $280,000 of the budget is spent and all significant improvements are finished and installed.

Outcome: The property’s value is now higher thanks to the upgrades – effectively, the EAT has invested $1.18 million (900k purchase + 280k improvements). Alice directs the EAT to transfer the property to her, which it does around day 160. The total value used in the exchange is $1.18M, which is very close to her $1.2M sale. Because she reinvested almost all her exchange funds into the like-kind property (land and improvements), her tax liability is nearly fully deferred. She successfully defers 100% of her capital gains and depreciation recapture. Alice effectively turned a fixer-upper into a modern rental complex using the buyer’s money (from her old property sale) tax-free for improvements. 💡 Key insight: By planning an improvement exchange, Alice not only deferred taxes, she also increased the value and rent potential of her new property significantly using pre-tax dollars.

Example 2: The Leftover Boot – When You Don’t Use All the Funds

Scenario: Bob sells a warehouse for $800,000. He finds a replacement property, a small retail building, for $600,000. He knows a 1031 requires equal or up value, so he considers using $200,000 of his proceeds to improve the retail building (adding new signage, redoing the parking lot, and reconfiguring the interior for multiple tenants). However, Bob doesn’t want the complexity of an improvement exchange with an EAT. He buys the retail property directly through a normal 1031 deferred exchange, which uses $600k of his funds via the QI.

Outcome: After closing, Bob has $200,000 still sitting with the QI. The exchange is technically complete once Bob took title of the retail building. That remaining $200k is not used to buy like-kind property. According to IRS rules, that $200k is boot. The QI will have to return it to Bob (usually after day 180 or once it’s clear he’s not buying anything else), and Bob will owe capital gains tax on that amount. Bob still decides to use that cash to renovate the building, but because he received it after the exchange, those improvements do not count toward the exchange. Essentially, Bob ended up doing a partial exchange: $600k was tax deferred, $200k was taxable. In hindsight, Bob realizes he could have structured an improvement exchange to avoid tax on the $200k by having the intermediary hold the property and make the improvements before he took ownership. But by skipping that step, he paid taxes on $200k. Key takeaway: If your replacement property costs less than your sale price, any leftover funds will be taxed unless you proactively use an improvement exchange structure or acquire additional property to cover the difference.

Example 3: Building a New Investment Property with 1031 Funds

Scenario: Clara owns a piece of raw land (held for investment) that has appreciated. It’s now worth $500,000, and she wants to sell it and use the money to build a self-storage facility in another state. Can she do this with a 1031 exchange?

Plan: Yes – using a construction exchange approach. Clara sells her land for $500k, and her QI holds the proceeds. She has already lined up a parcel of land in the target state for $200,000 and has building plans for a storage facility that will cost about $300,000 to construct. Within her 45-day window, Clara identifies: “Lot 4, Industrial Park (to be acquired for $200k) plus construction of a 50-unit self-storage facility (approximately $300k)”. The QI’s affiliated EAT forms an LLC and purchases the vacant Lot 4 for $200k using Clara’s exchange funds. Immediately, contractors break ground on the storage units, funded by draws from the remaining $300k held by the QI. Over the next five months, the storage facility is erected and mostly completed. They manage to spend $280,000 by the 180-day mark (the building is operational with 50 units, though some final touches will continue beyond the exchange period).

Outcome: The EAT transfers the land with the newly constructed storage facility to Clara before day 180 in exchange for the $500k of exchange funds it used. For 1031 purposes, Clara has acquired like-kind real estate worth $480,000 (land + improvements completed). She has $20,000 of her original proceeds that ended up unused in construction by the deadline – that $20k will be boot (taxable). But the bulk ($480k) was reinvested. Clara deferred most of her taxes and got a brand-new income-producing property. She’ll pay tax on the $20k boot, which she might consider a reasonable trade-off given the tight timeline. Clara essentially leveraged a 1031 to not just buy but build an investment asset with her sale proceeds.

These examples show how, with proper planning, you can accomplish a lot with 1031 funds – from major renovations to ground-up construction. They also highlight the importance of timing and structure: minor mistakes can turn potential tax deferral into a taxable event.

Yes, It’s Legal: IRS Guidelines and Precedents on 1031 Improvement Exchanges

If all this sounds a bit like creative tax magic, rest assured: using 1031 funds for improvements is grounded in solid IRS guidance and court decisions. Here’s the legal backbone that makes it possible:

• Internal Revenue Code §1031: This law provides the broad framework – no gain or loss is recognized if you swap real property for like-kind real property. While the code doesn’t explicitly mention building or improving property, it establishes the principle that you can roll over investment gains into new real estate without immediate tax.
• Treasury Regulations: IRS regulations for 1031 exchanges (especially Reg. §1.1031(k)-1) detail deferred exchange mechanics. They make it clear that if you receive cash or non-like-kind property, that’s taxable boot. The regs allow certain closing costs to be paid from exchange funds without tax, but improvements made after you take title are not considered like-kind property. This is why a standard exchange cannot cover post-closing improvements.
• IRS Safe Harbor for Improvements (Rev. Proc. 2000-37): In 2000, the IRS issued guidelines allowing improvement exchanges via a third-party Exchange Accommodation Titleholder (EAT). This procedure lays out the 180-day safe harbor and requirements for parking the property while improvements are made, giving taxpayers a clear legal pathway to use exchange funds for construction.
• Court Decisions: Tax courts have consistently upheld properly structured improvement exchanges and denied poorly structured ones. For instance, exchanges were disqualified when investors tried to improve property they already owned outside of an EAT arrangement. By contrast, when the rules are followed, courts treat the improvements as part of the like-kind exchange.

In summary, both IRS guidance and tax court precedents firmly support the use of 1031 funds for improvements when done correctly. The safe harbor rules have been in place for two decades now, and professionals execute improvement exchanges routinely within that framework. So you’re not operating in a gray zone – you’re following a well-trodden legal path. As long as you adhere to the 1031 exchange regulations and the specific safe harbor conditions, the IRS will treat your investment in improvements just like any other like-kind exchange. It’s a valid, legal strategy to build wealth in real estate without an immediate tax hit.

Traditional vs. Build-to-Suit vs. Reverse 1031 Exchanges: A Quick Comparison

Not all 1031 exchanges are created equal. Here’s a side-by-side comparison of popular 1031 exchange structures, including where improvements come into play:

Exchange Scenario	How It Works	Use of Funds	Complexity & Cost
Standard Delayed Exchange	Sell old property, then buy replacement property within 180 days using a QI. This is the typical deferred exchange.	All exchange funds go directly into acquiring the replacement property. No provision for new improvements (any leftover funds become boot).	Low to Moderate. Most common type; involves one sale and one purchase. Costs include QI fees and normal closing costs.
Build-to-Suit Improvement Exchange	Sell old property, and have an EAT purchase the replacement property or land. During the 180 days, improvements or construction are done using exchange funds. Finally, the improved property is transferred to you to complete the exchange.	Funds can be used to acquire property and pay for construction/renovation, increasing the replacement property’s value. Ideally, no cash is left over if done right.	High. Involves additional legal structures (EAT LLC), possibly two closings (from seller to EAT, then EAT to you). Higher QI fees and some carrying costs, but it’s worth it to defer tax on improvement funds.
Reverse Exchange	Buy the replacement property before selling the old one. An EAT temporarily holds one of the properties (usually the new one) because you can’t own both under 1031 rules. Then you sell the old property within 180 days, and the EAT transfers the new property to you.	Exchange funds from the eventual sale go to effectively purchase the new property that the EAT was holding. Not typically used for additional improvements (unless combined with a build-to-suit structure).	High. Requires significant upfront cash or financing to buy the new property before your sale. Complex structure, higher fees (due to the parking arrangement). Use this when you find a great replacement property before you can sell the old one.
Simultaneous Exchange	Sell your relinquished property and buy the replacement on the same day, literally swapping properties at closing (often still using a QI to facilitate).	All proceeds from the sale go immediately into the new property purchase in one direct transfer. No time or mechanism to use funds for improvements (everything happens in one day).	Moderate. Less common now due to logistical challenges. If you can pull it off, it’s quick and avoids holding costs, but timing must be perfect. Typically lower fees since there’s no long holding period for a QI.

Each scenario has its use-case. If your goal is specifically to use proceeds for improvements, the Build-to-Suit Improvement Exchange is the go-to structure. It comes with extra complexity, but it’s the mechanism that allows renovations or construction to be included in your exchange. Traditional exchanges are simpler but won’t accommodate new improvements. Reverse exchanges solve a different problem (locking in a property before you sell). Your situation will dictate the best approach – and sometimes, as investors discover, it’s worth dealing with a bit more complexity in an improvement exchange if it means deferring a large tax bill and ending up with a customized, higher-value asset.

FAQs: Quick Answers to Common 1031 Improvement Questions

Q: Can I use a 1031 exchange to improve a property I already own?
A: No. You cannot directly defer taxes by improving a property you already own. The replacement property in a 1031 must be acquired through the exchange, typically via an intermediary holding title during improvements.

Q: Can leftover 1031 funds be used for repairs after I close on the new property?
A: No. Once you take title to the replacement property, any unused exchange funds become taxable boot. Using that money for repairs post-closing is treated as if you received cash, which triggers tax on that amount.

Q: Does the replacement property have to be equal or greater in value to my old property?
A: Yes. To fully defer taxes, your replacement property (including any improvements made) should be of equal or greater value than the one you sold, and you must reinvest all your net sale proceeds into it.

Q: Is a build-to-suit (improvement) exchange legal under IRS rules?
A: Yes. The IRS explicitly allows improvement exchanges when properly structured. Revenue Procedure 2000-37 provides a safe harbor for using an EAT to hold and improve the replacement property within the 180-day exchange period.

Q: Do I have the full 180 days to finish all improvements in an exchange?
A: Yes. You get up to 180 days total. Any work not finished by then won’t count (unused funds become taxable boot). If needed, file a tax extension to maximize the 180-day period.

Q: Can 1031 exchange funds be used to buy land and build a new structure on it?
A: Yes. This is essentially a construction exchange. You can buy vacant land via an intermediary and use the exchange funds to build a new structure on it, as long as it’s completed within 180 days.

Q: Are improvement exchanges more expensive than regular 1031 exchanges?
A: Yes. They involve extra fees and complexity. You’ll pay more for intermediary services, legal setup, and possibly double closing costs. However, these expenses are often small compared to the potential tax savings.

Q: Do all states honor 1031 exchanges for state taxes?
A: Mostly yes. Almost all states follow federal 1031 rules, but a few have special requirements. Some require withholding at sale or extra paperwork when exchanging out-of-state. Check your state’s regulations to be sure.

Q: If I can’t finish the improvements by the 180-day deadline, is my exchange lost?
A: No. The exchange can still close, but only the value of work completed by day 180 counts. Any unused exchange funds become taxable boot. You can finish improvements later, but without 1031 tax benefits.

Q: Can I do a 1031 exchange to remodel a vacation home or personal residence?
A: No. Section 1031 only applies to investment or business property. Personal-use properties (like your home or a second home not used as a rental) do not qualify for a 1031 exchange at all.