Welcome to Part 7 of our 1031 Exchange Blog Series. If you’re thinking about building a property from the ground up—or exchanging into a newly developed space—this post is for you.
The good news?
Yes, you can use a 1031 Exchange for new construction and development projects.
The catch?
There are strict rules, and if you don’t follow them closely, you could lose your tax deferral.
What Is an Improvement or Build-to-Suit Exchange?
When you use a 1031 Exchange to reinvest in a newly constructed property or land under development, it’s called an Improvement Exchange or Build-to-Suit Exchange.
This strategy allows you to:
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Purchase vacant land or a building site
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Use your exchange proceeds to fund new construction
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Reinvest in a custom-designed property—tax-deferred
But here’s where it gets complicated…
The 180-Day Rule Still Applies
Even though your replacement property is being built, you still have 180 calendar days from the sale of your relinquished property to:
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Complete the construction
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Spend all exchange proceeds
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Take title to the property through your Qualified Intermediary
If the construction isn’t finished or the funds aren’t fully reinvested by the deadline, you may owe taxes on the unused portion.
The Wall Street Journal warns that delays in construction—permits, weather, labor—can derail even the best-laid 1031 plans.
How It Works: A Real Deal Example
Let’s say you sell a mixed-use property in Bay Ridge for $2 million.
You want to exchange into a ground-up 6-unit building in Greenwood Heights.
Your QI:
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Forms a temporary holding entity to take title to the land
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Oversees disbursement of construction funds
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Ensures all improvements are completed within 180 days
The Real Deal has profiled similar moves by NYC developers who use improvement exchanges to modernize portfolios and reduce long-term maintenance costs.
Common Mistakes to Avoid
The New York Times has documented investors who lost their 1031 status because:
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They didn’t complete construction in time
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The QI failed to take proper title
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They held the property personally instead of through an exchange structure
That’s why it’s critical to have: ✅ A tax advisor familiar with complex 1031s
✅ An experienced real estate attorney
✅ A trusted QI
✅ A project timeline that accounts for real-world delays
Strategic Takeaway
Improvement exchanges are powerful—but not for the faint of heart.
They require planning, coordination, and a team that understands both construction and compliance.
At Pen Realty, I help investors evaluate whether building new through a 1031 makes sense—and guide them from land acquisition to close.
Ready to Build Wealth—Literally?
If you’re considering exchanging into a development or value-add project, let’s build a plan that aligns with your goals and your timeline.
📧 Email: [email protected]
📞 Call/Text: 917.916.5126
▶️ Watch the full vlog series: @pmpenrealty
👉 Up next: Reverse 1031 Exchanges — How to Buy First and Sell Later
