What is the 30-month substantial improvement rule for Opportunity Zones?

One of the key requirements for Opportunity Zone real estate investments is the 30-month substantial improvement rule. This rule requires that Qualified Opportunity Funds (QOFs) that acquire existing properties make substantial improvements to the properties rather than simply holding them for appreciation.

The substantial improvement provision exists to ensure that capital invested in Opportunity Zones leads to active and meaningful improvements to properties rather than passive holding. This policy promotes economic revitalization and community development. Adherence to this rule is essential for maintaining compliance with OZ regulations and maximizing the program’s tax benefits. Below, we’ll break down what the 30-month substantial improvement rule entails, when the period begins, and why it matters.

Understanding the 30-Month Substantial Improvement Rule

The 30-month substantial improvement rule applies when a QOF acquires existing tangible property within an Opportunity Zone. Under this rule, the QOF must substantially improve the property within a 30-month period. The IRS defines “substantial improvement” as doubling the property’s basis, excluding the cost of land.

What Does Doubling the Basis Mean?

To comply with the rule, the QOF must spend at least the same amount as the property’s adjusted basis on improvements within 30 months of acquisition. The basis typically includes the purchase price plus any capital improvements made before acquisition.

For example:

If a QOF buys a building for $1 million (with $200,000 allocated to the land and $800,000 to the building), it must invest at least $800,000 in improvements within the 30-month period.
The cost of the land does not factor into the improvement calculation, as the land itself is not subject to the substantial improvement requirement.

What Qualifies as an Improvement?

To meet the rule, the improvements must:

Increase the property’s value or utility.
Include renovations, rehabilitations, or new construction.
Upgrade infrastructure related to the building (like plumbing or electrical systems).

Routine maintenance or repairs do not count as substantial improvements. The focus is on enhancing the property’s functionality or increasing its value.

When Does the 30-Month Period Begin?

According to the IRS regulations (TD 9889), the 30-month substantial improvement period begins on the date of acquisition of the tangible property. This means that the clock starts ticking as soon as the QOF legally takes ownership—usually on the closing date.

Why There Is Some Confusion

The IRS regulations use the phrase:

“The term 30-month substantial improvement period means any 30-month period, beginning after the date of acquisition of tangible property…”

Some interpreted this wording as suggesting flexibility, allowing the taxpayer to choose when the 30-month period starts. However, the practical and widely accepted interpretation among tax professionals is that the 30-month period begins immediately after the acquisition date and runs continuously without interruption.

Practical Interpretation

In practice, the 30-month period is understood to begin immediately after the acquisition date because:

IRS Intent: The goal of the rule is to promote immediate development and revitalization rather than allowing indefinite delays.
Professional Consensus: Tax practitioners consistently advise that the clock starts right after acquisition to avoid compliance issues.
Regulatory Context: Allowing a flexible start date would contradict the OZ program’s primary objective of prompt and tangible improvements.

Therefore, to comply with the rule, it is prudent to assume that the 30-month period starts as soon as the QOF takes title or legal possession of the property.

Exceptions and Special Cases

Original Use Exception

If the property is deemed to meet the criteria for original use within the OZ after acquisition by the QOF, the 30-month substantial improvement requirement does not apply. This typically applies to new construction or properties that have been unused or vacant for at least five years.

Safe Harbor for Multi-Building Projects

If a QOF purchases a campus or multi-building complex, the substantial improvement test can be applied on an aggregate basis rather than to each individual building. This means the QOF can combine improvement costs across the property to meet the doubling requirement.

COVID-19 Extensions

The IRS granted temporary relief during the COVID-19 pandemic, allowing QOFs more time to meet the substantial improvement requirement. As of 2025, these extensions have expired, but it’s important to stay updated on potential new guidance on disaster relief.

How the 31-Month Working Capital Safe Harbor Impacts the 30-Month Substantial Improvement Rule

The 31-month Working Capital Safe Harbor is an important Opportunity Zone provision that can significantly affect the 30-month substantial improvement requirement, especially in real estate projects.

What Is the 31-Month Safe Harbor?

The 31-month safe harbor allows Qualified Opportunity Zone Businesses (QOZBs) to hold working capital for up to 31 months without violating the requirement that at least 70% of their tangible property be located within an Opportunity Zone. To qualify, the business must:

Have a written plan outlining how the working capital will be used.
Include a written schedule showing that the capital will be spent within 31 months.
Demonstrate that the capital will be used to acquire, construct, or substantially improve property within the OZ.
Use the capital consistently with the plan.

How Does It Affect the 30-Month Substantial Improvement Rule?

The 31-month safe harbor can overlap with the 30-month substantial improvement period, effectively providing a protective timeframe for deploying capital.

Concurrent Timelines: The 31-month period often covers the 30-month improvement window, allowing the QOF to hold funds for improvement projects without jeopardizing compliance.
Mitigates Timing Risks: As long as the QOF follows the written plan and schedule, it remains compliant—even if all improvements are not immediately completed.
Strategic Use: This provision is particularly useful when real estate development requires phased construction or extended permitting processes.

By utilizing the 31-month safe harbor, QOFs can better align their improvement schedules with real-world development timelines, reducing the risk of non-compliance with the substantial improvement requirement.

Why the 30-Month Substantial Improvement Requirement Matters

Compliance with OZ Regulations

If the QOF does not meet the substantial improvement requirement within the 30-month period, the property may not count toward the fund’s 90% asset test, risking penalties or loss of QOF status.

Preserving Tax Benefits

Investors who comply with the 30-month rule maintain eligibility for OZ tax incentives, including deferral and potential tax-free appreciation if the property is held for at least 10 years. Completing improvements on time ensures that the property remains a compliant QOF asset.

Community Impact

The 30-month rule aligns with the program’s goal to promote economic development and revitalization in distressed areas. By ensuring that properties are actively improved rather than passively held, the rule supports long-term community growth.

Practical Tips for Adhering to the 30-Month Substantial Improvement Rule

Plan Before Acquisition: Assess improvement costs and project timelines to ensure compliance.
Start Immediately: Given that the 30-month clock starts at acquisition, initiate improvements as soon as possible to avoid running out of time.
Leverage the 31-Month Safe Harbor: Structure your working capital plan to align with substantial improvement timelines.
Monitor and Document: Keep meticulous contemporaneous records of expenditures, construction progress, and dates.
Consult Experts: Work with tax advisors and project managers who understand OZ regulations to mitigate compliance risks.

Conclusion

The 30-month substantial improvement rule for Opportunity Zones is crucial for maintaining QOF compliance and maximizing tax benefits. By utilizing the 31-month Working Capital Safe Harbor, investors can better manage the substantial improvement process without risking their tax incentives. Understanding how these two rules interact allows investors to plan strategically, ensuring both compliance and project success.

Failing to meet this requirement could jeopardize the project’s eligibility, so planning and executing improvements promptly is crucial. By proactively managing the substantial improvement process, QOFs can stay compliant, protect the tax advantages for their investors, and contribute to the revitalization of underserved communities.