Using 1031 Exchange Funds for a New Build Down Payment

[Frank Pyle]

A common question that comes up is whether you can use 1031 Exchange funds toward a new construction property — and how the timelines work.

The key factor isn’t when the funds are disbursed, but whether the property is completed and the title is transferred within the strict 180-day deadline of the exchange.

There are two possible approaches:

1. Standard Exchange
   If the new build can be completed and title transferred before the 180-day deadline, part of the exchange funds can be applied as an earnest money deposit. Once construction is finished, the property must be purchased and the title transferred by that deadline. If this doesn’t happen, the property won’t qualify for the 1031.

2. Improvement Exchange
   If it’s unlikely that the build will be completed in time, an “improvement exchange” structure may be used. In this setup, the land is purchased and title transferred before construction is complete. Any improvements finished (or underway) by the 180-day deadline can count toward the exchange. This way, at least the land and completed work qualify — instead of risking an all-or-nothing scenario.

Takeaway: When considering a new build as part of a 1031 Exchange, investors must plan around the 180-day timeline. Choosing the right structure upfront (standard vs. improvement exchange) ensures you maximize the benefits and avoid losing exchange eligibility.