Improvement and Build-to-Suit Exchanges

The core constraint is that exchange funds can only be spent on improvements while the property is still held by an exchange accommodation titleholder, not after the investor takes title directly. Once the investor owns the replacement property outright, any further construction is treated as a separate transaction funded with the investor's own after-tax dollars, not exchange proceeds. This is why improvement exchanges rely on the same parking structure used in a reverse exchange: the EAT holds title, the construction happens on that timeline, and the investor receives the improved property once work is far enough along and the 180-day deadline is approaching.

All construction funded with exchange proceeds has to be substantially complete, or at minimum have the exchange value fully spent, within 180 days of the relinquished property's sale. This is a tight window for meaningful construction work, particularly for ground-up development, so improvement exchanges are more commonly used for targeted renovation, tenant buildout, or expansion of an existing structure rather than building an entire property from a vacant lot. A Northern Virginia investor adding a mezzanine level to an industrial building to increase its usable square footage, for example, fits a 180-day timeline far more realistically than constructing a new building from the ground up.

To defer the full gain, the replacement property's value at the end of the exchange period, including whatever improvements were completed, needs to be equal to or greater than the value of the property sold. If construction is not finished by day 180, the property is valued as-is on that date, improvements included, which means partially completed construction still counts toward satisfying the exchange as long as enough value has been added or the purchase price plus completed work meets the threshold. Unfinished work beyond that point is simply the investor's own project, funded separately, once the exchange itself has closed.

Because the valuation happens on a fixed date rather than at project completion, an appraisal or a documented cost breakdown covering work performed through day 180 is generally necessary to support the reported value. A Virginia investor whose contractor is behind schedule should still document the value of work actually completed by the deadline, since an incomplete but partially valued project can still satisfy the exchange even when the original construction scope was not fully realized.

Because construction schedules routinely slip for reasons entirely unrelated to tax law, permitting delays, material lead times, or contractor availability, improvement exchanges require tighter coordination between the investor, the EAT, the contractor, and the qualified intermediary than a standard purchase. Draw schedules need to align with what the EAT can disburse under the exchange agreement, and permitting timelines specific to the Virginia jurisdiction where the property sits should be confirmed well before the 45-day identification period closes, since a permitting delay discovered on day 100 leaves far less room to adjust than one discovered during initial planning.

Every draw against the exchange account should be documented with an invoice or a contractor pay application tied to completed work, since the EAT and the qualified intermediary generally need a paper trail justifying each disbursement rather than a lump-sum release of funds. A Virginia investor working with a general contractor unfamiliar with exchange structures should walk through the draw process before signing a construction contract, because a contractor expecting a standard progress-payment schedule can be caught off guard by the additional documentation an exchange-funded project requires.