What is the Opportunity Zone 30-Month Rule?

Selling a highly appreciated investment property can bring a significant financial windfall, but long-term capital gains taxes can erode a hefty portion of your profits.

Investors who face a substantial capital gains tax liability after selling an investment property can defer their tax burden by investing in a Qualified Opportunity Fund (QOF). There are some key timelines and stipulations that must be met, most notably the 180-day and 30-month rule. 

Here’s a look at how both work.

What is a Qualified Opportunity Fund?

Qualified Opportunity Funds are investment vehicles that are created specifically to make investments in businesses and properties located in Qualified Opportunity Zones (QOZs). 

These zones are in hundreds of predetermined areas throughout the United States which have been deemed economically distressed and require additional incentives to stimulate fresh investment capital. A QOF must invest at least 90 percent of its assets into Qualified Opportunity Zone properties of businesses in order for investors to realize tax-advantaged treatment. Benefits increase with longer investment horizons:

• 10 percent step-up on the basis of deferred capital gains for holding periods of at least five years.
• 15 percent step-up on the basis of deferred capital gains for holding periods of at least seven years.
• Full deferral of any capital gains realized through asset appreciation on holding periods of at least 10 years. The QOZ property or business can be sold at fair market value and investors will receive a step-up in basis that eliminates any realized gains from the asset.

These investments carry many of the same risks as other types of real property investments, which can include liquidity, market, and business risk. 

QOF Timelines and Stipulations: The 180-Day and 30-Month Rule

In addition to the timelines mentioned above, there are some key stipulations for investing in a Qualified Opportunity Fund.

• 180-day rule. Investors have 180 days from the close of sale on their investment properties to make investments into Qualified Opportunity Funds.
• 30-month rule. The primary goal of the QOZ program is to stimulate economic development in distressed areas. Qualified Opportunity Funds have 30 months to make substantial improvements to properties. These improvements must be equal to the purchase price of the asset or business. For example, if a QOF purchases a property in a designated Qualified Opportunity Zone for $1 million, it must make substantial improvements totaling $1 million or more to the property within 30 month’s time in order for investors to realize the tax advantages that come with QOF investments.

Putting it all Together

Investors can realize several tax advantages by investing in Qualified Opportunity Funds. You have 180 days from the close of sale on an investment property to invest in a QOF, and the fund has a 30-month window to make substantial improvements on properties of businesses in Qualified Opportunity Zones. These improvements must be equal to or greater than the purchase price of the asset.

Qualified Opportunity Fund investments may not work for all investors. Consulting with a certified financial planner or registered investment adviser can help determine if QOF investments align with your personal investment strategy and tolerance for risk.