Unrecaptured Section 1250 gains and Qualified Opportunity Funds

[drs289]

I sold a rental property and have an unrecaptured Section 1250 gain. I would like to defer this gain by investing in a qualified opportunity fund. Are these gains eligible to be invested in QOFs?

It seems that there has been a shift in the rules over time, and I am not sure about the eligibility given the conflicting information I am finding online.

[Mike9241]

section 1250 gain can be ordinary income (referred to in IRC 1250 as additional depreciation) which does not qualify for QOF.  REG 1.400Z2(a)-1. Section 1250 gain can be a subset of 1231 gain - not ordinary income - taxed at a higher rate than pure capital gain.  

from IRC SEC 1250

(b)Additional depreciation defined
For purposes of this section—
(1)In general
The term “additional depreciation” means, in the case of any property, the depreciation adjustments in respect of such property; except that, in the case of property held more than one year, it means such adjustments only to the extent that they exceed the amount of the depreciation adjustments which would have resulted if such adjustments had been determined for each taxable year under the straight line method of adjustment.

however as to QOF there some tricky language 

this is what I found

The (new tax) law does not extend the deferred realization date for any capital gains invested in QOZs prior to 2027, which remains December 31, 2026.

here a link to some info from the IRS but it does not cover the new law.

https://www.irs.gov/credits-deductions/opportunity-zones-frequently-asked-questions 

I could find nothing that suggest a way to avoid recognizing gain for a pre 2027 QOF investment

[drs289]

Thank you so much for helping me with this. I am okay with a one year deferral.

Every year I rented the property, I had to take required depreciation using the 27 year straight line method. I sold the property this year for a profit, and as you know, the gain is separated between depreciation recapture and long term capital gains.

Some articles only mention that the capital gains portion is eligible, while other articles say that unrecaptured Section 1250 gain, which is the depreciation recapture, is also eligible. This is why I wanted to ask because it is confusing whether deferring the depreciation recapture portion by investing in a qualified opportunity fund is allowed based on the available information.

[drs289]

Here are some articles I read.

https://www.cozen.com/news-resources/publications/2025/opportu[product key removed]-the-one-big-beau...

"Only capital gains, and not ordinary gains, are eligible for the QOZ tax benefits (including short-term capital gains and Section 1231 and 1250 gains). "

and 

https://www.jw.com/wp-content/uploads/2019/10/QOF-deck-10-2019.pdf

"Generally, any capital gain from any source can qualify for the QOF rollover treatment. The gain being rolled over need not have anything to do with Opportunity Zones or QOFs (e.g., facebook stock gain qualifies). • This includes short-term capital gain, 1231 gains, 25% “unrecaptured section 1250 gain,” and certain mark-tomarket gain (but nor ordinary mark-to-market income). • However, it does not seem to include gain recaptured as ordinary income • Gain may be triggered intentionally in order to qualify for a rollover • Note that exchanges of real property must be structured to avoid a 1031 like-kind exchange if the goal is to trigger gains to use in a QOF. Section 1031 is not elective."

I'm not sure if the information is applicable to my rental depreciation recapture question.

[drs289]

Here are some resources I used.

“Only capital gains, and not ordinary gains, are eligible for the QOZ tax benefits (including short-term capital gains and Section 1231 and 1250 gains). Taxpayers that are eligible for the QOZ tax benefits generally are individuals, partnerships, C corporations, S Corporations, trusts, real estate investment trusts, and regulated investment companies.”

https://www.cozen.com/news-resources/publications/2025/opportu[product key removed]-the-one-big-beau...

“Generally, any capital gain from any source can qualify for the QOF rollover treatment.

 The gain being rolled over need not have anything to do with Opportunity Zones or QOFs (e.g., facebook stock gain qualifies). 

• This includes short-term capital gain, 1231 gains, 25% “unrecaptured section 1250 gain,” and certain mark-to-market gain (but not ordinary mark-to-market income).

• However, it does not seem to include gain recaptured as ordinary income 

• Gain may be triggered intentionally in order to qualify for a rollover 

• Note that exchanges of real property must be structured to avoid a 1031 like-kind exchange if the goal is to trigger gains to use in a QOF. Section 1031 is not elective”

https://www.jw.com/wp-content/uploads/2019/10/QOF-deck-10-2019.pdf

[drs289]

TurboTax also published an article. 

" How to avoid depreciation recapture

If you sell business property, depreciation recapture taxes will reduce the profitability of the sale. As a result, business owners ought to consider ways to avoid, mitigate, or delay depreciation recapture when possible.

Here are a few strategies that might work for you:

Sell business property and invest proceeds in a qualified opportunity fund. You can defer capital gains tax on the sale of business or personal property if you invest the proceeds in a qualified opportunity fund (QOF). The QOF will then invest money in economically distressed communities. However, you might also be able to eliminate depreciation recapture if you hold your investment for 10 years and certain other requirements are met. Unfortunately, investing in a QOF isn’t an option for everyone, since a very high minimum investment is typically required."

https://turbotax.intuit.com/tax-tips/rental-property/depreciation-recapture-definition-calculation-a...

[AmeliesUncle]

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@drs289 wrote:

the gain is separated between depreciation recapture and long term capital gains.

Some articles only mention that the capital gains portion is eligible, while other articles say that unrecaptured Section 1250 gain, which is the depreciation recapture, is also eligible. 

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Unrecaptured Section 1250 Gain (gain due to straight-line depreciation) is NOT "recapture".   As the phrase itself says, it is "unrecaptured".  

Unrecaptured Section 1250 Gain is a Capital Gain.

Because it is a Capital Gain, it qualifies for Qualified Opportunity treatment.