Does my depreciation recapture get eliminated?
Only capital gains qualify for QOZ fund investments, so to the extent gains are recharacterized as ordinary income under Section 1245 of the Code, they are not “qualifying gains” for purposes of investing in an OZ fund. So, we believe that the answer is that the tax on depreciation recapture is recharacterized as ordinary income and there’s no deferral on that gain, so the tax is due for the year in which it is realized. It is not owed again in 2027 when the deferred taxes are due. Of note, there’s not depreciation recapture within the QOZ Fund itself after the 10 year hold.