Eligible gain is gain treated as capital gain for federal tax purposes, short-term or long-term, plus qualified section 1231 gain, as long as it comes from a sale to an unrelated person (26 CFR 1.1400Z2(a)-1(b)(11)). As of October 2026, the 2025 law lets that gain be deferred in a Qualified Opportunity Fund indefinitely, with no end date on new elections; ordinary income, depreciation recapture and gain from related-party sales do not qualify.
This page sorts each common type of gain into qualifies or does not, and notes when its 180-day window starts and what character it keeps when it is taxed later. The window rules themselves are on the 180-day rule.
Key points
- Capital gain of any holding period and qualified section 1231 gain qualify. Losses are not netted against the gain, except for section 1256 contracts.
- Recapture under sections 1245 and 1250 is ordinary income and does not qualify.
- Gain from a sale to a related person (20 percent test) does not qualify.
- Deferred gain keeps its character: short-term stays short-term, collectibles gain stays collectibles gain.
- You can defer part of a gain; the rest stays eligible for a later election within its window.
The rule in the regulations
Under 26 CFR 1.1400Z2(a)-1(b)(11)(i), a gain is eligible if three things are true. It is treated as capital gain for federal tax purposes or is qualified 1231 gain. It would be recognized and subject to federal income tax if the investor did not elect deferral. And it does not arise from a sale or exchange with a related person.
Two measurement rules follow. Eligible gain is determined without taking losses into account unless the regulations say otherwise, so an investor with a $300,000 gain and a $100,000 loss in the same year can still defer the full $300,000. And any Code provision that turns potential capital gain into ordinary income applies first, so the recharacterized part is not eligible.
An investor may elect on part of a gain. The portion not yet elected remains eligible gain for a later election, which matters when money arrives in pieces. If an investor puts more into a fund than the eligible gain, the statute treats the investment as two separate investments, and only the deferred-gain part receives the tax benefits (26 U.S.C. 1400Z-2(e)(1)).
Gain by gain: what qualifies
| Type of gain | Eligible? | 180-day window generally starts | Character when later included |
|---|---|---|---|
| Short-term or long-term capital gain (for example, stock or land held for investment) | Yes | Day the gain would be recognized | Same as deferred: short-term or long-term |
| Collectibles gain (art, coins, other section 1(h)(5) collectibles) | Yes, it is capital gain | Day the gain would be recognized | Collectibles gain |
| Qualified section 1231 gain (business real estate or equipment held over a year) | Yes, the part above 1245/1250 recapture | Day the gain would be recognized, which is the sale date | Section 1231 gain recognized on the inclusion date |
| Depreciation recapture under section 1245 or 1250 | No | Not applicable | Not applicable |
| Net gain from qualified section 1256 contracts | Yes, net for the year | Last day of the tax year | Section 1256 split: 40 percent short-term, 60 percent long-term |
| Gain from positions in a straddle | Generally no, with narrow identified-straddle exceptions | For excepted net straddle gain, the earlier of final disposition or year end | Same as deferred |
| Partner's share of partnership capital gain | Yes, if the partnership does not defer it | Last day of the partnership's tax year, or by election the partnership's sale date or the return's unextended due date | Same as deferred |
| S corporation, nongrantor trust or estate gain passed to owners | Yes, under analogous rules | Analogous to partnership rules | Same as deferred |
| REIT or RIC capital gain dividends | Yes | Last day of the shareholder's tax year, or the dividend payment date | Same as deferred |
| Ordinary REIT dividends, interest, wages, business income | No, not capital gain | Not applicable | Not applicable |
| Installment sale gain (including sales before December 22, 2017) | Yes, as recognized | Each payment date, or the last day of the tax year | Same as deferred |
| Gain from an inclusion event on an earlier QOF investment | Yes | Date of the inclusion event | Same as deferred |
| OZ 1.0 gain recognized on December 31, 2026 because the investment was still held | No | Not applicable | Not applicable |
| Gain from a sale to a related person | No | Not applicable | Not applicable |
The character column comes from 26 CFR 1.1400Z2(a)-1(c)(1): included gain has the same attributes it would have had without deferral, including those under sections 1(h), 1222, 1231 and 1256, and is taxed under the rates that apply in the year it is included. The regulation's own examples cover short-term gain, collectibles gain and section 1256 gain.
Section 1231 gain from business property
Section 1231 gain arises on sales of property described in section 1231(b), which generally covers depreciable business property and business real estate held more than a year. Under paragraph (b)(11)(iii)(A), a section 1231 gain is a qualified 1231 gain to the extent it exceeds any amount treated as ordinary income under section 1245 or 1250. In practice, the recapture portion of a sale is taxed now and the rest can be deferred.
Because losses are not netted, each 1231 gain is measured on its own; a 1231 loss on another sale in the same year does not shrink it. Paragraph (b)(11)(iii)(B) sends 1231 gain to the general window rule, so its 180 days start on the day of the sale.
Gain from partnerships, S corporations, trusts and estates
A partnership is itself an eligible taxpayer and can elect to defer some or all of its eligible gains by investing in a QOF. If it does not, the gain flows into each partner's distributive share, and each partner may elect to defer it (26 CFR 1.1400Z2(a)-1(c)(7)-(8)). A partner's share counts only if it is eligible gain to the partnership and did not come from a sale to a person related to that partner.
Paragraph (c)(9) applies analogous rules to S corporations, nongrantor trusts and decedents' estates and their owners or beneficiaries. For a grantor trust, either the trust or its deemed owner may make the election. The partner's three possible window start dates are laid out, with dates, on the 180-day rule.
REIT and mutual fund distributions
Capital gain dividends from a REIT or a regulated investment company (RIC) are eligible gain. Paragraph (b)(7)(ii) lets the shareholder start the 180 days on the last day of the shareholder's tax year or, by choice, on the dividend payment date. Under the payment-date option, the eligible amount is limited to the capital gain dividends the REIT designated or the RIC reported for that shareholder for the year.
Undistributed capital gains that a shareholder must include under section 852(b)(3)(D) or 857(b)(3)(C) are also eligible. Their window starts, at the shareholder's election, on the last day of the fund's tax year or the last day of the shareholder's tax year. Ordinary REIT dividends are not capital gain, so they cannot be deferred.
Futures, options and straddles
Paragraph (b)(11)(vi) excludes gain from section 1256 contracts and from positions that were part of a straddle. The exception is net gain for the year from qualified section 1256 contracts, meaning contracts that were not part of a straddle at any time during the year. Its window starts on the last day of the tax year. Narrow exceptions also cover net gain from identified straddles and mixed straddle accounts when all positions are closed by year end.
Installment sales
Gain reported on the installment method is eligible as it is recognized, including gain from installment sales made before December 22, 2017 (paragraph (b)(11)(viii)). The investor may start the 180 days on each payment date, so each payment opens its own window, or on the last day of the tax year in which the gain is recognized.
What does not qualify
- Ordinary income. Wages, business profits, interest and ordinary dividends are not capital gain.
- Recapture. Gain recharacterized as ordinary income, such as section 1245 or 1250 recapture.
- Related-party sales. Gain from a sale to a person related to the investor, or to the pass-through entity that recognized the gain. Relatedness uses sections 267(b) and 707(b)(1) with 20 percent in place of 50 percent.
- Gain that is not taxed. The gain must be one that would otherwise be recognized and subject to federal income tax. A nonresident who would claim a treaty exemption must irrevocably waive it to elect deferral (paragraph (b)(11)(ix)(A)).
- Gain from funding the QOF interest itself. Gain realized when property is contributed to a QOF in exchange for the interest is not eligible (paragraph (b)(11)(v)).
- The December 31, 2026 deemed inclusion. OZ 1.0 gain recognized on that date because the investment was still held cannot be deferred again (Notice 2026-40, sec. 4.01(2)). This is different from an inclusion event such as a sale, whose gain can be reinvested; see inclusion events.
Hypothetical example
Suppose a business owner sells a warehouse used in the business for a $1,200,000 total gain, of which $200,000 is treated as ordinary income under section 1250 or 1245 rules. The qualified 1231 gain is $1,000,000.
The owner invests $700,000 in a QOF within 180 days of the sale and elects deferral on that amount. The remaining $300,000 of qualified 1231 gain can still be deferred by investing it before the same window closes. The $200,000 recaptured amount is taxed in the year of sale. Figures are illustrative only.
Making the election
The deferral election is made in the time, form and manner set by IRS forms and instructions (26 CFR 1.1400Z2(a)-1(d)(1)). On Form 8949, the deferral goes on its own row with the fund's EIN, the investment date, code Z in column (f) and the deferred amount as a negative number in column (g) (Form 8949 instructions). The investor also files Form 8997 each year the investment is held. Full steps are on how to report an Opportunity Zone investment.
Whether a particular gain qualifies can turn on facts this page cannot see, such as relatedness or straddle positions. This page explains the rules and is not tax advice; a tax adviser can confirm the treatment of a specific gain.
Common questions
Can short-term capital gains be invested in an Opportunity Zone fund?
Yes. Eligible gain is any gain treated as capital gain for federal tax purposes, short-term or long-term, plus qualified section 1231 gain. The gain keeps its character, so deferred short-term gain is still short-term gain when it is later included in income.
Does depreciation recapture qualify for Opportunity Zone deferral?
No. Gain that another Code provision recharacterizes as ordinary income, such as recapture under section 1245 or 1250, is not eligible. For section 1231 property, only the gain above the recapture amount is qualified 1231 gain.
Can I defer gain from selling property to a family member or my own company?
No. Gain from a sale to a related person does not qualify. Related is tested under sections 267(b) and 707(b)(1), with 20 percent substituted for 50 percent, so the threshold is lower than in most of the Code.
Do I have to net my capital losses before investing gains?
No. Eligible gain is measured without netting losses unless the regulations say otherwise, so a gain can be deferred even if the investor has losses elsewhere in the same year. Section 1256 contracts are an exception: only the net gain from qualified contracts counts.
Can a partner invest gain reported on a Schedule K-1?
Yes. If the partnership does not defer the gain itself, each partner may defer its distributive share of eligible gain, as long as the gain did not come from a sale to a person related to that partner. S corporation shareholders and trust or estate beneficiaries follow analogous rules.
Do REIT dividends qualify for Opportunity Zone deferral?
Capital gain dividends from a REIT or RIC qualify, and so do undistributed capital gains a shareholder must include. Ordinary REIT dividends are not capital gain, so they do not qualify.