I have a client who invested a total of $250,000 in an opportunity zone in 2021. $133,853 was deferred capital gain, the rest was additional cash. In 2024, the partnership distributed $63,053, the taxpayers share of non recourse debt is $23,447.

Everything I've read suggests that this is an inclusion event, making a portion of the distribution taxable. I am also under the assumption that since this is a mixed use investment, that the basis has to be tracked separately and the distribution and the non recourse debt have to be allocated proportionally, which results in the tax payer picking up a long term capital gain of $21,205.

How would I enter this transaction into Lacerte? My initial thought is to enter the gain on form 8949 code f, and then fill out form 8997 part 1, with the original deferred gain amount  and form 8997 part 3 with the  amount of the taxable gain. Or would I reduce the amount in part 1 of form 8997, by this years gain? Would I check any of the Opportunity Zone boxes in the dispositions screen?

Does the distribution this year reduce the amount of the deferred gain? Since the distribution doesn't terminate the interest in the partnership, does the entire deferred gain have to be brought into income this year?

Also, I am in California, which does not conform to the gain deferral, so the taxable distribution would be in CA income correct?

This is my only client with an Opportunity Zone investment, and the first time he has received a distribution. 

Thanks for you help.