Form 4797 (Sales of Business Property) is an essential tax document distributed by the Internal Revenue Service (IRS). It is designed to report gains made from the sale or exchange of business property. This includes property used to generate rental income and those intended for industrial, agricultural, or extractive resources.
When to Use Form 4797
When filling out Form 4797, you will need to supply the following critical information:
- Description of the property
- Purchase date
- Sale or transfer date
- Cost of purchase
- Gross sales price
- Depreciation amount (added to the sales price)
Key Takeaways
- Form 4797 is vital for reporting gains from the sale or exchange of business property.
- It is utilized for property that produces rental income or is used in industrial, agricultural, or extractive settings.
- Necessary information for the form includes the property description, purchase and sale dates, purchase cost, gross sales price, and depreciation amount.
Who Can File Form 4797?
Business property, including property purchased to produce rental income, can be reported on Form 4797. This form is also valid for homes used for business purposes. Gains made from the sale of oil, gas, geothermal, or mineral properties are also reportable.
If a property was used partially for business and partially as a primary residence, gains might be eligible for tax exclusion. This often applies to self-employed individuals and independent contractors who work from home.
The net profit or loss from selling business property is calculated by subtracting the cost basis (or purchase price) from the sales price minus depreciation costs.
How to File Form 4797
Form 4797 is divided into four parts:
- Part I: Most depreciable property held for more than a year.
- Part II: Property held for a year or less and sold for a loss, recorded as ordinary gains and losses.
- Part III: Capital assets held for more than a year and sold for a profit.
- Part IV: Recapture amounts when business use drops to 50% or less.
For corporations or partnerships, the total on Line 17 of Part II must be added to the gross income line on Schedule C. When property belonging to a flow-through entity such as a partnership or an S Corporation is sold, partners and shareholders might face a tax event when Form 4797 is filed.
Dispositions of capital assets not reported on Schedule D must be reported on Form 4797.
Choosing Between Schedule D and Form 4797
Schedule D is used to report gains from personal investments, whereas Form 4797 is dedicated to reporting gains from business-related real estate dealings.
Should You Use Form 8949 or Form 4797?
When reporting gains from the sale of real estate, Form 4797 typically suffices. However, if you’re deferring capital gains through investments in a qualified fund, Form 8949 is necessary.
How Do I Avoid Capital Gains Tax on a Business Sale?
While you cannot completely avoid paying capital gains tax, deferring it is possible by reinvesting your gains into an opportunity zone.
The Bottom Line
Form 4797 is essential for reporting financial gains from the sale or exchange of business property. Accurate completion of this form requires details such as the property description, purchase date, depreciation, and purchase cost. Understand these forms and elements to proceed with confidence in managing your business’s tax responsibilities.
Related Terms: Schedule D, Form 8949, capital gains tax, opportunity zones.
References
- Internal Revenue Service. “Form 4797, Sales of Business Property”, Page 1.
- Internal Revenue Service. “Instructions for Form 4797, Sales of Business Property”, Page 1.
- Internal Revenue Service. “Form 4797, Sales of Business Property”.
- Internal Revenue Service. “Instructions for Schedule C, Profit or Loss From Business”, Pages 2, 12.
- Internal Revenue Service. “Form 4797, Sales of Business Property”, Page 2.
- Internal Revenue Service. “Instructions for Form 4797, Sales of Business Property”, Page 5.
- Internal Revenue Service. “About Form 4797, Sales of Business Property”.
- Internal Revenue Service. “About Schedule D (Form 1040), Capital Gains and Losses”.
- Internal Revenue Service. “Instructions for Form 8949, Sales and Other Dispositions of Capital Assets”, Page 1.
- Internal Revenue Service. “Instructions for Form 8949, Sales and Other Dispositions of Capital Assets”, Pages 1, 11-12.
