When it makes sense
You sold for $800,000, and the right replacement costs $600,000 but needs $200,000 of work. In a standard exchange, that $200,000 gap becomes taxable “boot.” In an improvement exchange, the renovation itself absorbs the balance, and the full gain stays deferred.
How it works
- 1
Your sale closes normally
Proceeds move into your segregated exchange account. - 2
An exchange accommodation titleholder takes title
The titleholder holds the replacement property because improvements only count while the property is parked; work done after you take title doesn’t qualify. - 3
Exchange funds pay for construction
Funds are disbursed as the work progresses, under the identification you filed within 45 days. - 4
By day 180, the property transfers to you
The improvements must be substantially complete, and you receive the property at its improved value.
What to plan for
- Identification must describe the improvements, not just the property, so the plan needs to exist early.
- Loop in your tax professional up front. We coordinate with them to confirm the envisioned improvements meet the requirements before the structure is built.
Improvement exchanges pair naturally with reverse exchanges when you need to acquire and improve before selling. Both are structures we handle routinely.