The Improvements Exchange allows an investor, through the use of a Qualified Intermediary, to make improvements on a replacement property using exchange equity. If a taxpayer anticipates including new construction as replacement property, the construction must be done prior to the transfer of title to the taxpayer. Typically a Exchange Accomodation Title Holder (EAT) acquires title to the property and uses exchange proceeds or financing to fund the construction. Within 180 days or the completion of construction, whichever occurs first, the Qualified Intermediary transfers the property to the taxpayer. Any construction completed after the transfer date or the 180 day deadline does not qualify as like-kind property in the exchange. Partial construction can also qualify as replacement property as long as it is identified as such.

FORWARD EXCHANGE IMPROVEMENT SCENARIO:

Taxpayer has disposed of relinquished property through the Qualified Intermediary. Replacement property will require substantial improvements. The Exchange Accommodation Titleholder will purchase replacement property with exchange funds and then utilize the remaining funds for improvements. The taxpayer keeps track of and approves all construction expenditures. Improvements must be complete within 180 days from the sale of the relinquished property. The replacement property will be transferred to the taxpayer by the 180th day.

REVERSE EXCHANGE IMPROVEMENT SCENARIO:

Taxpayer wishes to dispose of relinquished property and acquire replacement property, which will require substantial improvements. Exchange Accommodation Titleholder (EAT) purchases replacement property with funds from Taxpayer Taxpayer keeps tract of and approves all construction expenditures. All improvements completed by the 180th day qualify as like-kind property in the exchange. Taxpayer must sell relinquished property by the 180th day. Exchange proceeds from the sale of the relinquished property are used towards the construction loan or to repay the loan from the Taxpayer