The lung is unique among mammalian vital organs; while it exhibits low cellular turnover during homeostasis, the lung can regenerate through the widespread proliferation and differentiation of resident progenitor cell populations upon injury. Epithelial insults and respiratory infections such as influenza can disrupt the gas exchange units of the lung, the alveoli, destroying alveolar epithelial type 2 (AT2) and type 1 (AT1) populations. Following such injuries, quiescent lung-resident epithelial progenitors become activated and participate in two distinct reparative pathways: functionally beneficial regeneration via injury-surviving AT2 proliferation and differentiation (which gives rise to more AT2s along with gas-exchanging AT1s), and dysplastic tissue remodeling via intrapulmonary airway-resident basal p63+ progenitors (which generates ectopic airway cell types in the alveolar space that are not thought to perform gas exchange). Utilizing in vivo genetic deletion and lineage tracing, orthotopic progenitor transplantation, in vitro organoid assays, and genome- and epigenome-wide sequencing, this work aims to understand the cellular plasticity inherent to both cell types and elucidate factors that convey their identity in order to promote functional regeneration of the alveolar epithelium and restore the oxygen-exchanging capacity of the damaged lung. We find that AT2 expansion ex vivo for their potential use as an exogenous source of regenerative alveolar progenitors fundamentally alters their identity, causing them to aberrantly form dysplastic tissue when transplanted. However, primary uncultured AT2 transplants retain their lineage fidelity and perform functionally beneficial regeneration as expected, ultimately enhancing lung function. We additionally find that the basal cell transcription factor ΔNp63 is required for intrapulmonary basal progenitors to participate in dysplastic alveolar remodeling following injury and that ΔNp63 restricts the plasticity of intrapulmonary basal progenitors by maintaining their epigenetic landscape. Following loss of ΔNp63, intrapulmonary basal progenitors are capable of either airway or alveolar differentiation depending on their surrounding environment both in vitro and in vivo, in the latter scenario converting into AT2s capable of generating AT1s. These orthogonal approaches elucidate critical regulatory mechanisms of fate choice and identity in these important players in lung repair, highlighting potential therapeutic targets to promote functional alveolar regeneration following severe lung injuries.