When selling a business property or one that generates cash flow, IRS Form 4797 is used. The IRS defines the specific property types as business property. We’ll list these property types and discuss filling out Form 4797.
Form 4797 is used when selling property that was used as a business. This is different from property that was used in a business, which might be the case if you are utilizing an asset or property for personal and business use.
For example, your personal vehicle is used periodically for business trips. You record mileage for a business deduction. Or, you might have a home office in your primary residence. In both cases, the asset or property is used for business but not as a business. The vehicle’s use is not fully dedicated to the operations of a business.
Form 4797 has three main sections:
The gain is reported on Form 4797 and Schedule D (as a long-term capital gain). Schedule D transfers to 1040 and is typically taxed at capital gain tax rates.
Residential property is considered Schedule 1250 and entered on part III. You’ll list the dates it was placed into service and sold.
To find the gain, start with Part III. Then transfer the gain to Part I. The following is an example calculation used in Part III.
Sell asset: $210,000
Original cost: $150,000
Depreciation over the years of ownership - $12,300 (subtract because of depreciation recapture)
(Adjusted basis: $137,700 = $150,000 - $12,300)
Gain: $73,200
The gain is calculated as:
$210,000
- $150000
+ $12,300
= $72,300
The $72,300 gain is reported on Schedule D. Then report the gain on Schedule 1 of Form 1040. That value is then used for the calculation on Form 1040, line 6.
If you are selling or transferring a business property or property that generates cash flow, Form 4797 should be used. The sale of personal property should not be listed on this form.
Business property types that can be listed on Form 4797 include sections 1245, 1250, 1252, 1254, or 1255. These property types are wide-ranging, and it is best to read through each type to understand if your property falls within this group. Your accountant can also help in identifying your property type.