The short answer
The capital part only. Section 741 treats gain on selling a partnership interest as capital gain except as section 751 provides, and section 751 treats the price attributable to your share of the partnership's unrealized receivables and inventory as ordinary income. Unrealized receivables include the recapture the partnership would have on its equipment and other depreciated property. The opportunity zone regulation counts any rule that turns capital gain into ordinary income, so the eligible amount is your total gain minus the section 751 amount. Because you, not the partnership, are selling, your 180 days start on your closing date.
At a glance
| Default character | Capital gain under section 741 |
|---|---|
| Carve-out | Price attributable to unrealized receivables and inventory is ordinary under section 751(a) |
| Receivables include | Unbilled service income and would-be section 1245 and 1250 recapture |
| How it is measured | A hypothetical sale of all partnership property at fair market value |
| Eligible amount | Total gain minus the section 751 ordinary income |
| 25% and 28% gain | Look-through unrecaptured 1250 and collectibles gain stay capital and eligible |
| Clock | 180 days from your own sale date; no K-1 start-date options |
| Statement | Attach the section 751 statement to your return for the sale year |
Selling the interest is mostly capital gain, but section 751 pulls out an ordinary slice
Section 741 says gain or loss on the sale of a partnership interest is gain or loss from a capital asset, except as section 751 provides. Section 751(a) then treats money received for your share of the partnership's unrealized receivables or inventory items as realized from property other than a capital asset, which makes it ordinary income.
The definition of unrealized receivables in section 751(c) is wide. It covers rights to payment for goods and services not yet taken into income, which matters for a cash-method service business, and it also includes section 1245 property and section 1250 property to the extent the partnership would have recapture under those sections if it sold them at fair market value.
Reg. section 1.751-1(a)(2) fixes the number by a hypothetical sale: the ordinary income is what would have been allocated to you if the partnership had sold all of its property for cash at fair market value just before your sale. The rest of your gain is capital gain.
The fund takes the capital remainder, including look-through 25% and 28% gain
Reg. section 1.1400Z2(a)-1(b)(11)(i)(A) defines eligible gain as capital gain determined by taking into account any provision of the Code that recharacterizes potential capital gain as ordinary income. Section 751 is such a provision, so the ordinary slice is never eligible and the capital remainder is.
Some of that remainder carries a higher rate. Reg. section 1.1(h)-1 requires a selling partner to treat a share of the partnership's collectibles gain as collectibles gain and a share of its section 1250 capital gain as unrecaptured section 1250 gain. Both are still capital gain, so both can be deferred, and the regulation's attribute rule brings them back at their own rates when the deferral ends.
So a real estate LLC that has taken straight-line depreciation on buildings usually has little section 751 income, while one that used a cost segregation study and bonus depreciation on short-life components can have a large one, because those components are section 1245 property. Can I put depreciation recapture into an opportunity zone fund covers the recapture rule itself.
Hypothetical: a $3,000,000 gain, $500,000 ordinary, $2,500,000 eligible
Round, hypothetical figures. You own 40% of an LLC taxed as a partnership that runs a cash-method professional practice and owns its equipment. On July 1, 2027 you sell your interest to an outside investor for $4,000,000. Your outside basis is $1,000,000, so your gain is $3,000,000.
The hypothetical sale under the regulation allocates to you $300,000 of unbilled and uncollected fees and $200,000 of equipment recapture: $500,000 of ordinary income under section 751, taxed in 2027 at your ordinary rates. The remaining $2,500,000 is long-term capital gain.
Counting July 1 as day one, the 180-day window ends on December 27, 2027. Invest up to $2,500,000 in a qualified opportunity fund by then and that amount leaves your 2027 return under the five-year rule from Public Law 119-21. A fund interest is illiquid, has no public market and can lose principal, so many sellers defer only part. Have the partnership's accountant produce the section 751 figure before you set the amount with your CPA.
Your sale has its own clock and its own related-person check
When the partnership sells assets, partners get three possible start dates, as who makes the election when a partnership sells explains. When you sell your interest, the gain is yours alone, and the regulation's general rule starts the 180 days on the day the gain would be recognized, normally the closing.
The buyer must not be related to you. A sale to a co-member is fine unless that person is family or an entity you own more than 20% of. A redemption by the partnership itself is a distribution under different rules, and a partnership in which you own more than 20% is related to you under section 707(b)(1) read at 20%; a sale to a family member or business partner works through the test.
Reg. section 1.751-1(a)(3) requires you to attach a statement to your return for the sale year showing the date of the sale and the gain attributable to section 751 property and to capital gain. Report the deferral on Form 8949 with code Z, and file Form 8997 each year you hold the fund interest.
A 1031 exchange cannot take the interest, but the building may have another path
Since 2018, section 1031 has applied only to real property, and an interest in a partnership is not real property; the partnership interest exclusion explains the rule. Selling your interest therefore leaves the fund, or paying the tax, as the federal options for the gain.
If the LLC's main asset is real estate and the members are willing, a different structure can change the answer: the LLC distributes undivided interests before a sale so each member can exchange, or sells the property and exchanges at the entity level. Drop-and-swap strategies covers those routes and their timing risks.
Those structures must be in place before a buyer is signed, because once you have sold the interest the gain is fixed as gain on a partnership interest. If a sale of the interest is already agreed, the fund is the deferral that remains for the capital part.
Related questions
Do I get the K-1 start-date options for gain on selling my interest?
No. Those options apply to gain the partnership recognizes and passes through. Gain on your own sale of the interest starts its 180 days on the day you recognize it.
Our LLC is taxed as an S corporation. Does section 751 apply?
No. Section 751 applies to partnership interests. An S corporation interest is stock, though the collectibles look-through in Reg. section 1.1(h)-1 still applies to it.
Does unrecaptured section 1250 gain from the LLC's buildings qualify?
Yes. It is capital gain taxed at up to 25%, not ordinary income, so it is eligible, and it keeps that character when it is later included.
What if the buyer pays me over several years?
The capital gain may be reported on the installment method, which has its own start-date rule in what date starts the 180-day window. Have your CPA confirm how the section 751 amount is reported.
Who calculates the section 751 amount?
The partnership's accountant, from the hypothetical sale of the partnership's property at fair market value. You need that figure before you can know the eligible gain.
Sources
Checked against these publications on October 8, 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.
- 26 U.S. Code section 741, Recognition and character of gain or loss on sale or exchange
- 26 U.S. Code section 751, Unrealized receivables and inventory items
- Reg. section 1.751-1, Unrealized receivables and inventory items
- Reg. section 1.1(h)-1, Capital gains look-through rule for sales or exchanges of interests in a partnership, S corporation, or trust
- Reg. section 1.1400Z2(a)-1, Deferring tax on capital gains by investing in opportunity zones
- 26 U.S. Code section 1400Z-2, Special rules for capital gains invested in opportunity zones
- Public Law 119-21, section 70421 (opportunity zone amendments)
- IRS, Instructions for Form 8949