What is a reverse 1031 exchange?

A reverse exchange is one where you acquire the replacement property before selling the relinquished property. Because you cannot own both ends of an exchange at once, an exchange accommodation titleholder — usually a single-member LLC formed by your qualified intermediary — takes and holds title to one of the properties under a qualified exchange accommodation arrangement. Revenue Procedure 2000-37 provides a safe harbor under which the IRS will respect the EAT as the beneficial owner of the parked property for federal income tax purposes.

Do the 45-day and 180-day deadlines apply to a reverse exchange?

Yes, in mirrored form. Once the EAT takes title to the replacement property, you have 45 days to identify in writing the property or properties you will relinquish, and 180 days from the EAT's acquisition for the EAT to transfer the parked property to you and complete the exchange. The pressure moves from finding a replacement to selling what you already own, which for many owners is the easier problem — but it is still a hard deadline.

Can I finish construction after the 180 days?

Only the improvements actually completed and in place by the time the property transfers to you count toward the exchange. Work that is still in progress, materials sitting on site, or amounts prepaid for future construction generally do not count. This is the central planning constraint in an improvement exchange: the build has to be scoped so that enough verifiable value is in the ground within the exchange period, which often means prioritizing site work, shell and permanent fixtures over finish-out.

How much does a reverse exchange cost?

Materially more than a forward exchange. In addition to the qualified intermediary's fee you are paying for formation and administration of the special purpose entity, the EAT's fees, additional title and insurance costs, and often carrying costs on the parked property. Expect fees in the high four to five figures depending on complexity, plus lender involvement. The structure earns its keep when the replacement property is genuinely worth securing early — a scarce asset, a motivated seller, a below-market basis — not as a routine convenience.

1031 Exchange · September 25, 2026 · Steven Owen

Reverse and improvement 1031 exchanges: buying first, and building with exchange funds

Q: What is an improvement or build-to-suit 1031 exchange?

An improvement exchange uses the same parking structure to make construction costs count toward your replacement value. You cannot spend exchange funds improving property you already own, so the exchange accommodation titleholder takes title to the replacement property, your exchange funds are loaned to the EAT, and the EAT pays the contractors directly. At the end of the exchange period the improved property transfers to you, and the value of improvements actually completed and in place counts toward the replacement requirement.

A standard exchange assumes you sell first and buy second. The market does not always cooperate. When the right replacement property surfaces before your sale closes — or when the replacement only works if you build on it — Revenue Procedure 2000-37 provides a safe harbor that solves both. An exchange accommodation titleholder, typically a single-member LLC formed by your qualified intermediary, takes and holds legal title to one side of the transaction in a qualified exchange accommodation arrangement, and the IRS will respect it as the beneficial owner. In a reverse exchange the EAT parks the property you are buying until you can sell. In an improvement exchange the EAT holds it while your exchange funds pay for construction. Both are expensive and both are sometimes the only way the deal happens.

Why parking is necessary at all

Section 1031 contemplates an exchange — a disposition and an acquisition linked together. You cannot hold title to both the old and the new property simultaneously and still call it an exchange, and you cannot use exchange funds to improve something you already own, because improving your own property is not acquiring like-kind property from someone else. Parking solves both by putting a legally separate party on title for a defined period.

Revenue Procedure 2000-37 is what makes this safe rather than aggressive. Before it, reverse exchanges existed but lived in uncertainty. The revenue procedure set out conditions under which the Service will not challenge the EAT’s ownership, which is why practitioners work inside the safe harbor rather than around it.

The reverse exchange, step by step

Step	What happens	Timing
1	You identify the replacement property and arrange financing. The QI forms a single-purpose LLC as the exchange accommodation titleholder.	Before closing
2	The EAT acquires and takes title to the replacement property, typically funded by your cash and/or a loan you guarantee. The parking period begins.	Day 0
3	You identify in writing which property or properties you will relinquish.	Within 45 days of the EAT’s acquisition
4	You sell the relinquished property through the QI in the normal way.	Before day 180
5	The EAT transfers the parked replacement property to you, completing the exchange.	By day 180 after the EAT acquired it

Notice the symmetry: the same 45 and 180 day periods you know from a forward exchange apply, just anchored to the EAT’s acquisition and pointed at the disposition instead of the purchase. For an owner whose property will sell readily, that is a much more comfortable risk than hunting for a replacement under a 45-day gun.

The variation worth knowing: the EAT can park either side. Parking the replacement property is most common. Parking the relinquished property — an “exchange last” structure — is sometimes used when a lender will not allow the new loan to sit in an EAT-owned entity.

The improvement exchange

This is the structure for owners whose replacement target is worth less than what they sold, or is raw land, or needs capital to become the asset they actually want. The mechanics:

The EAT takes title to the replacement property. Your exchange funds are loaned to the EAT rather than paid to a seller, and the EAT pays contractors and vendors directly as construction proceeds. When the exchange period ends, the EAT transfers the property — now improved — to you, and the replacement value counted toward your exchange includes the improvements that are actually in place.

That last clause is the one that governs the whole project. Only improvements completed and in place when the property transfers to you count. Work in progress, materials delivered but not installed, and deposits toward future work generally do not. A build that will take fourteen months does not become a 180-day build because you wish it would. In practice this pushes improvement exchanges toward scopes that put verifiable value in the ground early: site work, utilities, pads, shell construction, roof and structure — and away from long-lead finish-out.

Improvement exchanges also pair naturally with land. An owner exchanging out of an operating property into a land position can use the structure to fund entitlement-driven site improvements with pre-tax dollars rather than after-tax cash.

What these structures cost

Meaningfully more than a forward exchange, and the number varies with complexity. You are paying for entity formation and administration, the EAT’s fees for holding title and accepting the associated exposure, a second set of title and closing costs, additional insurance, and often carrying costs on the parked asset. Budget in the high four to five figures for professional fees on a straightforward reverse, more on an improvement exchange with active construction. That is before lender fees.

Lenders are the practical gating item. The EAT, not you, is on title during the parking period, and not every lender will write a loan into a special purpose entity owned by an accommodator, or will do so without a guarantee and a set of covenants. Confirm lender willingness before you commit to the structure. A reverse exchange that cannot be financed is just an expensive way to lose a deal.

When it is worth it

A reverse exchange is worth the cost when the replacement property is genuinely scarce or genuinely mispriced — a corner you have wanted for a decade, a seller who needs certainty now, a below-market basis that will not survive broad marketing. It is not worth it as a routine convenience, and it is a poor substitute for simply starting the replacement search earlier. If your only problem is that you have not found anything yet, the cheaper answers are to widen the search, use the identification rules deliberately, or consider a DST as a backstop.

An improvement exchange is worth it when the value gap between what you sold and what you can buy is large enough that construction is the only way to avoid trading down and creating boot — and when the scope can realistically deliver that value inside the period.

How SCORE helps

Steven Owen is an Austin commercial real estate Agent who runs these structures with the constraint in mind rather than discovering it late: lender appetite first, construction schedule second, price third. SCORE sources the replacement property, coordinates with your qualified intermediary and the accommodator, tests whether the build scope can put enough value in the ground inside the exchange period, and runs the disposition so the back half of the timeline actually closes. See 1031 exchange services and development land.

Found the replacement before you sold?

Tell us what you are buying and what you would relinquish. We’ll tell you whether a reverse or improvement structure pencils once fees, financing and the construction calendar are in it.

Talk to Steven 1031 services

This article is general information for commercial real estate owners and investors, not tax or legal advice. Section 1031 is federal tax law and its application depends on facts specific to you and your property. Before starting an exchange, engage a qualified intermediary and confirm treatment with your CPA or tax counsel — SCORE Property Group and Steven Owen are real estate professionals, not tax advisors, and do not act as a qualified intermediary. Authorities referenced: Internal Revenue Code §1031 as amended by the Tax Cuts and Jobs Act (real property only, effective 2018) and left unchanged by the One Big Beautiful Bill Act signed July 4, 2025; Treas. Reg. §1.1031(k)-1; Rev. Proc. 2000-37; Rev. Rul. 2004-86; IRS Form 8824. Verified as of September 25, 2026. Related: How a 1031 exchange works in Texas · The 45-day and 180-day deadlines · Boot and debt replacement · 1031 exchanges and land.