Yes, you can buy an apartment building being built, but it is one of the most complex versions of a 1031 exchange. This is known as an Improvement Exchange (or "Build-to-Suit" Exchange).
Because you must close within 180 days, and large apartment buildings often take years to build, you have to be very careful with how the transaction is structured.
1. The "Improvement Exchange" Structure
In a normal exchange, the Qualified Intermediary (QI) just holds your money. In an improvement exchange, a special entity called an Exchange Accommodation Titleholder (EAT)—usually run by your QI—must actually "park" (hold title to) the new property while it is being built.
- You cannot own the land while the improvements are being made with exchange funds. If you already own the land, you can't use 1031 funds to build on it because you'd be "improving your own property," which the IRS doesn't allow for an exchange.
- The EAT holds the deed during construction and uses your exchange proceeds to pay the builders.
2. The 180-Day "Snap-Shot" Rule
This is the hardest part. The IRS only recognizes the value of the building as it exists on Day 180. * If you sold your old property for $5M, your new property (land + whatever construction is finished) must be worth at least $5M by Day 180.
- Pre-paid labor doesn't count. You can't just hand the builder a check for $2M on Day 179 for future work. The building must actually be physically improved to that value by the deadline.
- Materials on site don't count. Stacks of lumber or appliances sitting in boxes are "personal property," not "real property." They must be attached to the building to count toward the exchange value.
3. Requirements for New Construction
To make this work for an apartment building, you must meet these criteria:
- Identification (Day 45): You must identify not just the land, but a detailed description of the specific building to be constructed.
- Substantial Completion: The building doesn't necessarily have to be 100% finished or have a Certificate of Occupancy, but it must be "substantially the same property" you identified on Day 45.
- Title Transfer: On or before Day 180, the EAT must deed the property (in its current state of construction) over to you.
Comparison: Standard vs. Improvement Exchange
| Feature | Standard Exchange | Improvement Exchange |
|---|---|---|
| Complexity | Moderate | High |
| QI Fees | $800 – $1,500 | $5,000 – $10,000+ |
| Title Holder | You take title at closing | EAT holds title during build |
| Risk | Low (if dates are met) | High (if construction is delayed) |
Is it worth it?
Most investors only do this if the apartment building is already near completion when they start their 1031 exchange. Trying to start a ground-up multi-family project and hitting the "equal or greater value" mark in just 6 months is extremely risky.
A common alternative: Many investors instead look for "Certificate of Occupancy" (C of O) deals, where they contract to buy the building only once it is finished, ensuring they close within their 180-day window without the headache of an Improvement Exchange.
Do you have a specific developer or project in mind that is already under construction?