SARS-CoV-2, the agent that causes COVID-19, invades epithelial cells, including those of the respiratory and gastrointestinal mucosa, using angiotensin-converting enzyme-2 (ACE2) as a receptor. Subsequent inflammation can promote rapid virus clearance, but severe cases of COVID-19 are characterized by an inefficient immune response that fails to clear the infection. Using primary epithelial organoids from human colon, we explored how the central antiviral mediator IFN-gamma, which is elevated in COVID-19, affects epithelial cell differentiation, ACE2 expression, and susceptibility to infection with SARS-CoV-2. In mouse and human colon, ACE2 is mainly expressed by surface enterocytes. Inducing enterocyte differentiation in organoid culture resulted in increased ACE2 production. IFN-gamma treatment promoted differentiation into mature KRT20(+) enterocytes expressing high levels of ACE2, increased susceptibility to SARS-CoV-2 infection, and resulted in enhanced virus production in infected cells. Similarly, infection-induced epithelial interferon signaling promoted enterocyte maturation and enhanced ACE2 expression. We here reveal a mechanism by which IFN-gamma-driven inflammatory responses induce a vulnerable epithelial state with robust replication of SARS-CoV-2, which may have an impact on disease outcome and virus transmission.