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How To Go About Tax Form 4797 Sales of Business Property

How To Go About Tax Form 4797 Sales of Business Property

You will need to use Tax Form 4797 Sales of Business Property in addition to your regular tax return if you have bought or sold a property for business purposes within the past year. We have included an in-depth look at this specific form, what it means, how it differs from a Schedule D, and what you need to know about it before submitting it to the IRS. 

Tax Form 4797 Sale of Business Property Defined

If you gain from the sale or transfer of property used to conduct business, you must file Tax Form 4797 with the Internal Revenue Service (IRS). In addition to these properties, any property that generated rental income and home used for business operations are also included.

Moreover, IRS Tax Form 4797 is used to report gains from the sale of business properties that were used for agricultural, industrial, or extractive purposes. You should also include any gain realized from the sale of business property used for oil, gas, geothermal energy, or mineral exploration. Additionally, this form should be used in the event that your business was involuntarily converted or recaptured.

In certain situations, though, you may not need to complete this form, such as if you work from home and are selling your main residence. If that were the case, any gains from the sale of your primary residence would be exempt from capital gains taxes. This form is primarily used to report gains from the sale of real estate that was used exclusively for business purposes.

How Do Schedule D and Tax Form 4797 Differ?

People often wonder whether they should fill out a Schedule D or Tax Form 4797 when they file their tax returns and have sold real estate in the past year. There is a significant difference between these two items, even though they both relate to reporting gains. Reporting personal gains is done on a Schedule D while reporting gains from the sale of property used for business purposes is done on Tax Form 4797 Sale of Business Property.

If you used the same real estate asset both for businesses and for personal purposes, any realized gains must be allocated accordingly between Schedule D and Tax Form 4797.

Use Cases of Schedule D and Tax Form 4797

In this case example, let's consider a condominium as the property you sold. Prior to selling, you used one condo as your primary residence while renting out the other. The sale of business property brought you a profit of $45,000.

Considering that there are two condos in the building, you might consider splitting the amount equally between them. To account for the gain on the rental property, Tax Form 4797 would require $22,500 in reporting. The sale of your principal residence can be claimed as an exclusion on Schedule D for $22,500.

The same principle applies if you own a startup space that also has livable apartment space above it, or you own a ranch where your house is also located.

Filling Out Tax Form 4797

Tax Form 4797 Sale of Business Property can be obtained through the IRS website or from a tax preparer’s office. Once you have obtained a copy, finish filling out your tax return with your name and your I.D. number. Those who have their business registered as corporations will have their EIN number, while individuals would have their social security number.

form 4797

If you reported earnings from sales or exchanges on a Form 1099, you should include them on Line 1.

form 4797 line 1

Part I

If you bought or sold business property that you held for more than one year, you record it in Part 1, Line 2. For each property you have purchased or sold, you should include the date it was purchased or sold, the gross sales price, any depreciation, the cost of improvements, and the total gain or loss you have experienced.

Add each amount along with any other amounts specified in the following lines:

form 4797 Part 1

Line 3: Any gain reported on line 42 of Form 4684.

Line 4: Gains from installment sales under Section 1231.

Line 5: Gain or loss on a like-kind exchange reported on Form 8824 if any (under Section 1231).

Line 6: Any gain reported on Line 32 of your tax return, excluding losses from theft or casualty.

Line 7: Enter how much you gained or lost based on the information in lines 2-6.

form 4797

Line 8: You should record any past-due Section 1231 losses here if you have any.

Line 9: Calculate your qualified gains or losses by subtracting Line 8 from Line 7.

4797 lines 8-9

It is considered a gain or loss on its sale based on the difference between its realization from the disposal and its depletion basis. To determine whether it is the sale of business property capital or ordinary gain or loss, you should fill out form 4797 with your other section 1231 gains or losses.

Part II

form 4797 part 2

Similarly to Part 1 of your tax return, you will have to complete Part II, but this time you will have to include any gain or loss on a property you owned for at least a year. If you made any ordinary gains or losses, you should report them in the manner described for Lines 11-18.

Part III

Line 19 should include any gains reported under Sections 1245, 1250, 1252, 1254, or 1255, along with the dates acquired and sold. Similarly, you must fill out Lines 20-24 with the sale price, cost basis, depreciation and gain for each property.

form 4797 part 3

If you are filling out Lines 25-29, you must include the information requested since each property is subject to a different section of the tax code.

form 4797 lines 25-29

After that, add the appropriate lines in Lines 30-32 to get the total applicable gains.

form 4797 summary

Part IV

Lastly, any recaptured amounts should be reported on form 4797under Lines 33-35 of Part IV.

form 4797 part 4

Form 4797 should then be attached to your regular tax return after you have completed it. In any event, you should also keep a copy of this document for your records.

What Should You Do Next?

Though Form 4797 Sale of Business Property includes instructions that offer guidance, there can still be a lot of confusion that leads to costly mistakes, particularly for real estate investors and other business professionals who don't have extensive experience with tax laws.

In light of this, it is a good idea to get professional advice from a CPA and/or other local tax professionals to guide you on sale of business property tax rate. Specifically, you may want to inquire if they are familiar with real estate taxes and Form 4797 just to make sure they know their stuff.

Ines Zemelman, EA
Founder of TFX