Can You 1031 Into New Construction: Deadlines, Boot, and Costs

You can use a 1031 exchange into new construction, but only through a specific structure the IRS calls a build-to-suit or improvement exchange. Sale proceeds from your relinquished property fund construction on a replacement site while a third party holds legal title, and all work must be physically completed within 180 days of the original sale (or by your tax return due date, whichever comes first). Done correctly, this defers capital gains tax on the sale just like a standard 1031. Done incorrectly, it collapses into a taxable transaction.

Why New Construction Needs a Different Structure

A standard 1031 exchange swaps one existing investment property for another. Both sides of the trade already exist, so the mechanics are relatively clean. New construction breaks that model because the replacement property doesn’t fully exist on the day you sell. The IRS won’t let you take your sale proceeds, pour them into building a structure on land you own, and call the finished project a replacement property. Construction on land you already hold is treated as an improvement, not as an acquisition.

The workaround is a safe harbor the IRS created in Revenue Procedure 2000-37. A third-party entity acquires the replacement site and holds legal title during construction, and the IRS treats that entity as the beneficial owner while the build progresses.¹ When construction is far enough along, title transfers to you, and the finished property qualifies as the replacement in your exchange.

The underlying tax benefit is the same one available in any 1031: no gain or loss is recognized when real property held for business or investment is exchanged for like-kind real property that will also be held for business or investment.²

What Qualifies as Replacement Property

The like-kind standard for real estate is broad. You can sell a warehouse and build an office complex on vacant land. You can sell an apartment building and construct a retail center. What matters is that both properties are real property held for productive use in a trade or business, or for investment.²

Two categories are out:

Property held primarily for sale. A developer building to flip cannot use Section 1031.
Personal residences. A primary home or vacation home is not investment property.

Since the Tax Cuts and Jobs Act took effect in 2018, Section 1031 covers only real property. Equipment, vehicles, artwork, and other personal or intangible property no longer qualify.³ For construction, this means materials incorporated into the building become part of the real property, but standalone items like removable equipment or furniture purchased during the build don’t count toward your exchange value.

And the point worth repeating: you generally cannot build on land you already own. The safe harbor structure exists precisely to work around that limit by putting the site in a third party’s hands during construction.

The Two Parties Who Make It Work

A build-to-suit exchange runs on two distinct entities, and confusing their roles is one of the fastest ways to lose the deferral.

The Qualified Intermediary (QI) holds the proceeds from your sale in a restricted account. You never touch this money. The QI releases funds directly to contractors and suppliers based on approved construction draws. If the proceeds pass through your personal accounts at any point, the IRS can treat that as constructive receipt, and the exchange fails.

The Exchange Accommodation Titleholder (EAT) takes legal title to the replacement site. The EAT is typically a special-purpose LLC formed for this transaction. Revenue Procedure 2000-37 requires it to hold qualified indicia of ownership, which in practice means legal title or a leasehold interest throughout construction.¹ Because the EAT technically owns the site during the build, the finished structure counts as newly acquired property when title transfers to you.

The EAT usually acts as the borrower on any construction loan, with you providing a personal guarantee. Lenders tend to prefer this arrangement because the property stays as collateral and the borrowing entity doesn’t change hands mid-project. You can often be appointed as the EAT’s manager, which lets you approve draws and make day-to-day construction decisions without creating a constructive receipt problem.

The 45-Day and 180-Day Clocks

Two deadlines govern every 1031 exchange, and they don’t bend for construction schedules.

Within 45 days of transferring your relinquished property, you must identify the replacement property in a signed written document delivered to the QI or another party in the exchange. For a build-to-suit, the identification must describe both the land and the improvements to be constructed.² Real property is treated as unambiguously described if you provide a legal description, street address, or distinguishable name along with a summary of the planned construction. The most commonly used identification option lets you name up to three properties regardless of their combined value, which is enough to cover a primary construction site plus one or two backups.⁴

The replacement property must actually be received within 180 days of the transfer, or by the due date of your tax return for the year of the transfer (including extensions), whichever comes first.² That second cutoff surprises people. Sell in October and your return is due the following April, which is fewer than 180 days unless you file for an extension. Filing an extension is standard practice in build-to-suit exchanges for exactly this reason.

Here is the part that hurts most projects: only improvements physically completed and in place by the end of the exchange period count toward your replacement property value. Materials in a warehouse, work in progress, and deposits paid for future work do not count. A project that is 90% complete on day 180 leaves you with taxable exposure on the remaining 10%.

Matching Value and Debt: How Boot Gets Created

To defer all of your gain, two things need to line up. First, the total value of the replacement property (land plus completed improvements) must equal or exceed the sale price of the relinquished property. Second, the debt on the replacement property must equal or exceed the debt on the property you sold. Any shortfall is called boot, and it triggers recognized gain up to the amount of the boot.²

Boot shows up in two common forms in construction exchanges:

Cash boot. Exchange proceeds that weren’t spent on completed construction by day 180. If your construction budget was $800,000 but only $650,000 of work was in place in time, the remaining $150,000 is taxable.
Mortgage boot. If the debt on the new property is lower than the debt on the property you sold, the IRS treats the reduction as a benefit. You can offset it by contributing additional cash or by taking on equal or greater debt on the replacement side.

Boot is taxed at whatever rates apply to the underlying gain, which can include the 0%, 15%, or 20% long-term capital gains rate, up to 25% on unrecaptured Section 1250 gain from prior depreciation, and the 3.8% net investment income tax for higher earners.⁵ That stack is why investors will pay a premium for expedited construction rather than let the clock run out.

Costs to Budget For

Build-to-suit exchanges carry higher professional fees than standard 1031 transactions because of the coordination involved. A Qualified Intermediary for a standard exchange typically charges between $750 and $1,500. Improvement exchanges often run $3,000 to $10,000 or more due to the longer timeline and construction draw management. Setting up the EAT entity adds more, and total professional fees for the exchange structure (separate from construction costs) can exceed $10,000 depending on transaction size.

These fees are on top of the actual construction budget and are generally not deductible as part of the exchange. Building them into your plan early matters, because running short of funds near day 180 is exactly how boot gets created.

Where These Exchanges Typically Fail

Build-to-suit exchanges fail more often than standard 1031s, and the failures cluster around a few patterns.

Underestimating the 180-day window. Construction projects slip. Permit delays, weather, labor shortages, and material backorders all push completion. Because only finished, in-place work counts, any slippage past day 180 creates taxable boot. Selecting projects with realistic timelines and a buffer of at least 30 days is how experienced investors protect the deferral.

Touching the money. If exchange proceeds move through your hands or personal accounts for any amount of time, the IRS can argue constructive receipt and disqualify the exchange. All payments should flow from the QI to the EAT or directly to contractors.

Trying to build on land you already own. The EAT structure exists because the IRS treats construction on your own land as an improvement, not an acquisition. Attempts to transfer land you already own into an EAT to work around this don’t fit the safe harbor in Revenue Procedure 2000-37, which contemplates the EAT acquiring the replacement property.¹

Forgetting the debt side. Investors focus on matching sale price to property value and overlook the mortgage. If you sold a property with $500,000 of debt and the new construction loan is only $300,000, that $200,000 gap is mortgage boot unless you add cash to the exchange.

Vague identification. A 45-day identification of “vacant lot on Main Street” without describing the planned construction may not satisfy the requirement. Include the legal description, a construction summary, and the estimated budget in the written identification.

Reporting the Exchange on Form 8824

Every 1031 exchange, including a build-to-suit, is reported on IRS Form 8824, filed with your federal tax return for the year the exchange occurred.⁶ The form captures the identification date (proving you met the 45-day deadline), the date you received the like-kind property (proving you met the 180-day deadline), and any recognized gain from boot.

Recognized gain flows from Form 8824 to the appropriate return: Schedule D for capital gains, Form 4797 for business property sales, or Form 6252 if installment sale treatment applies.⁷IRS.gov. 2025 Instructions for Form 8824 – Like-Kind Exchanges

1
Internal Revenue Service. Rev. Proc. 2000-37
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Office of the Law Revision Counsel. 26 USC 1031 – Exchange of Real Property Held for Productive Use or Investment
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Internal Revenue Service. Like-Kind Exchanges – Real Estate Tax Tips
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GovInfo. 26 CFR 1.1031(k)-1 – Treatment of Deferred Exchanges
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Internal Revenue Service. Topic No. 409 – Capital Gains and Losses
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IRS.gov. 2025 Instructions for Form 8824 – Like-Kind Exchanges
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