The short answer
Partly. Unrecaptured section 1250 gain, the straight-line building depreciation that is taxed at up to 25%, is capital gain inside your section 1231 gain and can be deferred by investing it in a qualified opportunity fund within 180 days of the sale. Gain treated as ordinary income cannot: that means section 1245 recapture on equipment and on components a cost segregation study reclassified, and section 1250 recapture of depreciation taken faster than straight line. When the deferral ends, the unrecaptured 1250 gain comes back with its 25% ceiling intact.
At a glance
| Unrecaptured 1250 gain | Eligible; it is capital gain within the section 1231 gain |
|---|---|
| Section 1245 recapture | Not eligible; ordinary income |
| Section 1250 additional depreciation | Not eligible; ordinary income from faster-than-straight-line methods |
| Qualified 1231 gain | The 1231 gain above the amounts treated as ordinary under sections 1245 and 1250 |
| Window | 180 days from the date of sale |
| Character when included | Same as when deferred, including the 25% ceiling |
| 2026 top ordinary rate | 37% over $768,700 of taxable income on a joint return |
The regulation draws the line at ordinary income, not at the word recapture
Reg. Section 1.1400Z2(a)-1(b)(11)(i) makes a gain eligible if it is capital gain or qualified 1231 gain, after applying any Code provision that recharacterizes potential capital gain as ordinary income. Paragraph (b)(11)(iii)(A) then defines qualified 1231 gain as section 1231 gain 'to the extent that it exceeds any amount... treated as ordinary income under section 1245 or section 1250.'
Q29 of the IRS opportunity zone FAQs states the consequence plainly: ordinary gain is not eligible, and an investment made with it is a non-qualifying investment.
So the question is not whether a slice of your gain is called recapture. It is whether the Code taxes that slice as ordinary income or as capital gain.
Straight-line building depreciation is capital gain, so it qualifies
Section 1250 recaptures as ordinary income only 'additional depreciation,' which section 1250(b)(1) defines, for property held more than a year, as depreciation in excess of what the straight-line method would have produced. Section 168(b)(3) requires the straight-line method for residential rental and nonresidential real property, so they normally have no section 1250 ordinary income at all.
The depreciation still shows up at sale as unrecaptured section 1250 gain, defined in section 1(h)(6) as long-term capital gain that would be ordinary if section 1250 reached all depreciation. It is taxed at a maximum 25% rather than 15% or 20%, but it is capital gain, so it sits inside the qualified 1231 gain.
That is usually the largest recapture layer on a rental sale, and it can go into a fund. How it is computed for your property is in how much depreciation recapture on a rental sale.
Cost segregation and equipment create section 1245 income that is taxed now
Section 1245(a)(1) treats gain on section 1245 property as ordinary income up to the depreciation taken. Appliances, furniture and the building components a cost segregation study moved into 5-, 7- and 15-year classes fall here, and bonus depreciation on them makes the recapture larger.
That ordinary slice cannot be deferred in a fund. It is taxed in the year of sale at ordinary rates, which for 2026 reach 37% on joint taxable income over $768,700 under Rev. Proc. 2025-32.
If your property had a study done, the allocation of the sale price among components decides how much is ordinary; see section 1245 recapture on real estate.
A hypothetical $700,000 rental gain splits into what can go in and what cannot
Assume a hypothetical rental sold at a $700,000 gain: $60,000 of section 1245 recapture on components from an earlier cost segregation study, $240,000 of unrecaptured section 1250 gain and $400,000 of appreciation.
The qualified 1231 gain is $640,000. Investing $640,000 in a fund within 180 days of the sale defers all of it; the $60,000 is taxed in the sale year at ordinary rates.
When the deferral ends, the regulation preserves character, so $240,000 is taxed at up to 25% and $400,000 at the 0%, 15% or 20% capital gain rates, plus the 3.8% net investment income tax where it applies. Treat the numbers as an illustration and have your CPA rework them for your sale.
Report it through Form 4797, and compare the fund with an exchange that defers every layer
Section 1231 gains are reported on Form 4797 and carried to Form 8949 for the deferral. The Form 8949 instructions use two rows: a code O row bringing the amount over from Form 4797, then a row with the fund's EIN, the investment date, code Z and the deferred amount. Under Reg. Section 1.1400Z2(a)-1(c)(1) the gain keeps its section 1(h) attributes when it is later included.
A 1031 exchange can defer all three layers, including the section 1245 slice, if the replacement holds enough section 1245 property, which is covered in does a 1031 defer depreciation recapture. The fund route keeps your basis in cash but leaves the ordinary slice taxed.
If you invest only part of the gain, the deferral follows the dollars you invest; the sizing rule is in gain or whole sale price.
Related questions
Is unrecaptured section 1250 gain really capital gain?
Yes. Section 1(h)(6) defines it as long-term capital gain that would be ordinary only if section 1250 reached all depreciation; it simply carries a 25% maximum rate.
When does the 180-day window start for a rental sale?
On the date of the sale. Q15 of the IRS opportunity zone FAQs says the period begins on the day the 1231 gain was realized.
Can I net my 1231 losses before deciding what to invest?
The regulation measures eligible gain without taking losses into account unless the opportunity zone regulations say otherwise, so the gross qualified 1231 gain from the sale is what you may invest.
Does the 25% rate survive the deferral?
Yes. The regulation gives included gain the same attributes it would have had without deferral, including those under section 1(h).
I never claimed depreciation. Is there still recapture?
Publication 544 measures depreciation as the amount allowed or allowable, so recapture can arise anyway; see recapture on depreciation never claimed.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- Treas. Reg. Section 1.1400Z2(a)-1, eligible gain and qualified 1231 gain
- IRS, Opportunity zones frequently asked questions
- 26 U.S.C. Section 1, unrecaptured section 1250 gain
- 26 U.S.C. Section 1250, additional depreciation
- 26 U.S.C. Section 1245, gain from dispositions of depreciable property
- IRS, Instructions for Form 8949 (2025)
- IRS Publication 544, sales and other dispositions of assets
- 26 U.S.C. Section 168, accelerated cost recovery
- IRS Rev. Proc. 2025-32, 2026 inflation adjustments