Property that a Qualified Opportunity Fund or its business buys already in use in a zone qualifies only if it is substantially improved: within any 30-month period after purchase, additions to its basis must exceed its adjusted basis at the start of that period, which in practice means more than doubling the building's basis (26 U.S.C. 1400Z-2(d)(2)(D)(ii)). As of October 2026, the bar is lower in zones made up entirely of rural area, where additions need only exceed 50 percent of basis, and land never has to be improved on its own.
Substantial improvement is the alternative to original use. New construction and property never before placed in service in the zone use the original use test instead; see original use and vacant property. Either test is one of the requirements for qualified opportunity zone business property.
- Window
- Any 30 months after purchase
- Standard
- More than 100% of basis
- Rural zone
- More than 50% of basis
- Land
- Excluded
The test
The regulation states it plainly: property has been substantially improved "when the additions to basis of the property in the hands of the QOF exceed an amount equal to the adjusted basis of such property at the beginning of such 30-month period" (26 CFR 1.1400Z2(d)-2(b)(4)(i)). Three details follow from the text:
- Exceed, not equal. Additions must be more than the starting basis. Spending exactly the starting basis falls short.
- Any 30-month period. The statute measures "during any 30-month period beginning after the date of acquisition," so the clock does not have to start on the closing date.
- Basis in the hands of the fund or business. The test uses tax basis additions, so qualifying spending is spending that is capitalized into the property's basis.
The test applies to each property. Used property that has never been placed in service in the zone can meet original use instead, and does not need this test (26 CFR 1.1400Z2(d)-2(b)(3)(i)(C)).
Land is carved out
When a fund or business buys a building on land in a zone, substantial improvement of the building is measured by additions to the building's basis (paragraph (b)(4)(iv)(A)). There is no requirement to separately improve the land under the building (paragraph (b)(4)(iv)(E)). Unimproved land bought in a zone does not have to be substantially improved at all (paragraph (b)(4)(iv)(B)).
The exception is land that is unimproved or minimally improved and bought with an expectation or intention not to improve it by more than an insubstantial amount within 30 months. That land does not qualify unless it is substantially improved. In judging intent, the regulation counts grading, clearing, remediation of contamination and purchases of related property that make the land usable in the business. Betterments the fund pays for, such as remediation, can be added to the land's basis.
Hypothetical example
Suppose a QOZB buys an existing apartment building for $5,000,000 and allocates $1,500,000 of the price to land and $3,500,000 to the building. The 30-month period starts at purchase.
- Standard zone. Building basis at the start is $3,500,000. Capitalized additions to the building over 30 months must exceed $3,500,000. Spending $3,500,001 or more passes; the land needs no spending.
- Zone made up entirely of rural area. Additions must exceed 50 percent of $3,500,000, or $1,750,000.
- If the whole price were wrongly treated as building basis. The standard target would appear to be $5,000,000, overstating the required spend by $1,500,000.
Figures are illustrative only. The land and building split is an allocation for tax purposes and should be supported.
The 50 percent rural rule
Public Law 119-21 sec. 70421(c)(4)(C) amended the test so that, for property in a zone "comprised entirely of a rural area," additions need only exceed 50 percent of adjusted basis. Unlike most of the 2025 changes, this one took effect on the date of enactment, July 4, 2025 (sec. 70421(c)(5)(C)).
Notice 2025-50 applies the 50 percent threshold to any determination made on or after July 4, 2025 for property in an entirely rural 2018 zone, and identifies 3,309 of the 2018 zones as entirely rural. A rural area is any area other than a city or town with more than 50,000 people and any urbanized area contiguous and adjacent to it. For the 2018 zones, the notice uses 2020 census incorporated places and Census Bureau urban areas to apply that definition.
Form 8996 instructions have not caught up. The IRS said on November 24, 2025 that the 50 percent rule will be added at their next revision. See rural Opportunity Zones for how to tell whether a tract is entirely rural.
Aggregation: three ways to count more than one item
| Rule | What it allows | Conditions |
|---|---|---|
| Original use property that improves functionality, (b)(4)(iii) | Counting the cost of newly purchased original use property (furniture, equipment) toward the basis additions of an existing building | Same zone or a contiguous zone, same trade or business, improves the building's functionality; the building itself must also be improved by more than an insubstantial amount; the counted items stop being original use property for the 90 percent test |
| Buildings on one deeded parcel, (b)(4)(v)(B) | Treating several buildings as a single property, with their bases and additions summed | Each building lies entirely within a parcel described in a single deed |
| Buildings on contiguous parcels, (b)(4)(v)(C) | The same single-property treatment across separate deeds | Contiguous parcels; the businesses are operated exclusively by the entity, share facilities or significant centralized elements, and operate in coordination with or reliance on one another |
The regulation's hotel example shows the first rule. A fund buys a hotel with $4,000,000 of basis allocated to the building, furniture and fixtures, then spends $1,000,000 on linens, mattresses and furniture, $500,000 on gym equipment, $1,000,000 on a restaurant and $1,500,000 on structural work. By electing to count the new items toward the hotel's basis, the fund meets the requirement, which the regulation describes as doubling its basis in the hotel and its fixtures. An apartment building a block away cannot be pooled with the hotel; it is a separate property.
Treatment during the 30 months
For the fund's 90 percent test, property being substantially improved but not yet placed in service is treated as qualifying during the 30-month period, if the fund or business reasonably expects to substantially improve it and use it in a zone by the end of that period (26 CFR 1.1400Z2(d)-2(b)(4)(ii)). The same property does not count for the 5-year continuation rule in section 1400Z-2(d)(3)(B) unless it is qualifying property for at least two years without this rule.
Construction spending usually comes from cash the business holds under the working capital safe harbor, which has its own 31-month schedule. The two clocks run separately.
Acquisition dates under OZ 2.0
The test applies only to property acquired by purchase after the applicable date. For property acquired after December 31, 2026, that is the zone's applicable start date, which is January 1, 2027 for zones in the first new round (Notice 2026-40, sec. 5.01(1)). Property bought after December 31, 2026 for use in a 2018 zone generally cannot qualify unless a transition exception applies, such as a working capital plan already under way or an ordinary-course replacement.
For a new zone, a building bought on or after its applicable start date and improved within 30 months follows the same test. As of October 30, 2026, the national list of certified 2027 zones had not been published, so whether a given tract will be a zone, and whether it will be entirely rural, depends on that list. Check the Opportunity Zone lookup and 2027 designations.
This page explains how the test works. It is not tax advice; basis allocations and capitalization questions should be confirmed with a tax adviser. For renovation and construction debt sized around this test, see Opportunity Zone construction loans.
Common questions
What is the substantial improvement test for Opportunity Zones?
Property that does not meet the original use test must be substantially improved: during any 30-month period after acquisition, additions to its basis must exceed its adjusted basis at the start of that period. For a building, that effectively means spending more than the building's purchase basis within 30 months.
Does land have to be substantially improved?
No. Land in a zone bought by purchase does not itself have to be substantially improved, and the test for a building is measured on the building's basis alone. The exception is unimproved or minimally improved land bought with no intention to improve it by more than an insubstantial amount within 30 months.
What is the rural substantial improvement threshold?
In a zone made up entirely of rural area, additions to basis need only exceed 50 percent of the adjusted basis. The rule took effect July 4, 2025 and applies now to the 3,309 entirely rural zones from the 2018 map, as well as to rural zones in the new map.
Can I combine several buildings for the substantial improvement test?
Yes, in some cases. Buildings entirely within one parcel described in a single deed can be treated as one property. Buildings on contiguous parcels in separate deeds can also be grouped if they are operated by the same entity, share significant business elements, and are run in coordination with one another.
Is the property treated as qualifying while it is being improved?
For the fund's 90 percent test, property undergoing improvement is treated as qualifying during the 30-month period if the fund or business reasonably expects to substantially improve it and use it in a zone by the end of that period.