The short answer
An improvement exchange costs several times what a plain delayed exchange does, because someone other than you has to own the replacement property while it is built. Under Rev. Proc. 2000-37, an exchange accommodation titleholder holds title, borrows or receives your money, pays the contractor, and deeds the property to you within 180 days. You pay for that entity, for a second conveyance and its title and recording charges, for the construction loan's requirements, and for carrying costs during the build. The largest cost is the one no fee schedule shows: any part of your proceeds not physically turned into improvements by the time you take title is taxable boot.
At a glance
| Who holds title | An exchange accommodation titleholder, not you or a disqualified person |
|---|---|
| Paperwork deadline | Qualified exchange accommodation agreement within 5 business days |
| Identification | 45 days, with the land's legal description and as much construction detail as practicable |
| Outside limit | Deed to you no later than 180 days after the titleholder acquires |
| Work after you take title | Treated as services, not like-kind property |
| Allowed support | You may guarantee the titleholder's loan, advance funds and supervise the work |
| Fee treatment | Exchange expenses reduce boot on Form 8824, then add to basis |
| Your own land | Not eligible if you owned it within the 180 days before the titleholder takes it |
You are paying for a second owner, which is why the fee is not a delayed-exchange fee
A delayed exchange needs an intermediary to hold cash for a few months. An improvement exchange needs a party to own real estate, sign construction contracts and carry debt. Section 4.02 of Rev. Proc. 2000-37 requires that 'qualified indicia of ownership' be held by a person who is not the taxpayer or a disqualified person, and allows that to be done through a single-member LLC that the titleholder owns.
That entity usually has to be formed, insured and closed for each project, and it appears on the purchase contract, the loan documents and the deed. You are paying for those documents, for a second set of title and recording charges when the titleholder conveys to you, and for the titleholder's time administering draws.
For a sense of how the plain forward fee compares, read how much a 1031 exchange costs. The step-by-step structure is in the improvement exchange guide; this page is about the bill.
The construction money is the titleholder's problem, and the lender will make it yours
Your exchange proceeds alone rarely pay for land and a building, so the titleholder usually borrows. Section 4.03 of the revenue procedure lets you guarantee the titleholder's debt, indemnify it against costs, lend or advance it funds, lease the property from it, and supervise the improvements or act as contractor, all without losing the safe harbor.
Those permissions describe what lenders will ask for. Expect underwriting of you as guarantor, a loan to an entity you do not own, draw inspections and the lender's own legal review. Each adds fees and time, and a lender that will not lend to a titleholder-owned entity can end the plan before it starts.
Carrying costs during construction, such as interest, insurance and property taxes, are paid while the titleholder holds the property. Whether exchange money can fund those items without creating boot is a question for your CPA before the budget is set.
Day 180 sets the hardest cost: unbuilt value is taxable
Section 4.02(5) requires the property to be transferred to you within 180 days after the titleholder acquired it, and Reg. Section 1.1031(k)-1(e)(4) says production after you receive the property 'will not be treated as the receipt of property of a like kind'. Only what is physically in place when you take title counts as replacement property.
Exchange money paid out for work that has not been installed, such as deposits on materials or prepaid contractor fees, does not count. Paragraph (e)(3) adds a second test: the property you receive must be substantially the same as what you identified, ignoring only usual production changes.
If your sale price was higher than the land plus completed improvements on the day you take title, the gap is boot, taxed to the extent of your gain. On a long build, this cost dwarfs every fee on the invoice.
A hypothetical budget: $1,500,000 sold, $1,500,000 planned
Hypothetical figures: you sell a building for $1,500,000 with no debt and plan to buy a $600,000 lot and build $900,000 of improvements. The titleholder's entity buys the lot with $600,000 of your exchange proceeds, and the remaining $900,000 is advanced to it for the build.
On day 170 the contractor has completed $700,000 of work. If the titleholder deeds the property then, you receive $1,300,000 of real property for a $1,500,000 sale, and $200,000 of your proceeds that went to unfinished work or still sits unspent is boot. Add the titleholder's fees, two sets of closing costs and five months of carrying costs on top. Run your own numbers with your CPA.
When a simpler replacement covers the part that cannot be built in time
The fees are reported like any other exchange expense: they reduce cash boot on Form 8824 and the rest goes into basis, as explained in exchange fees: deductible or basis. They do not change the arithmetic of an unfinished building.
A common fix is to identify a second property alongside the build so that any shortfall has somewhere to go. A Delaware Statutory Trust interest identified by day 45 can absorb an exact dollar figure late in the exchange period, which is the logic in splitting an exchange between a DST and direct property.
If you already own the land, the structure changes and the cost rises again; see building on land you already own.
Related questions
Can I pay the contractor directly and get exchange credit?
Not while the titleholder owns the property and holds your funds. Payments run through the titleholder or the intermediary; money that passes through your hands risks being treated as received under Reg. Section 1.1031(k)-1(f).
Does the titleholder have to be paid a market fee?
Rev. Proc. 2000-37 allows the permitted arrangements even when their terms are not arm's length, but section 3.03 lets the IRS recast payments as a fee to the titleholder to reflect economic substance.
Can the build run past 180 days if I accept some boot?
The safe harbor requires the deed to you within 180 days. Work after that is outside the exchange, so you take title on time and finish the building with your own money.
Is transfer tax charged on the titleholder's deed to me?
That depends on the state. Some charge each conveyance; see transfer tax on both legs and your state closing page.
Can I use land I bought last year as the site?
Rev. Proc. 2004-51 removes the safe harbor for replacement property you owned within the 180 days before the titleholder took it, and land owned longer than that raises separate problems covered in the land-you-own answer.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.