What Is Form 4797: A Tax Guide For Real Estate Investors

Key Takeaways:


Real estate has proven to be an invaluable tax shelter for today’s investors. It is thanks to properly crafted tax strategies that good investments can turn into great wealth-building opportunities. That said, no tax strategy is complete without knowing how to file the proper paperwork. Investors and business owners must know which steps to take if they hope to optimize their own profits come tax time, and understanding Form 4797 is no exception. The following is dedicated to teaching investors what Form 4797 is and how to fill it out and what implications it may have for their businesses.

To be clear, this is an introductory summary for what investors may expect from Form 4797. For more in-depth Form 4797 instructions, please refer to the Internal Revenue Service’ (IRS) Instructions for Form 4797.

What Is Form 4797 Used For?

Anyone who has realized gains from the sale or transfer of a property used for business purposes is required to file Form 4797 with the IRS for the year the gains were realized. If, for example, a property was put in service to generate cash flow or used as a business and then sold for a profit, the owner realizing the capital gains will be required to file Form 4797 with the IRS. This particular form is reserved for reporting gains from the sale of real estate that was used solely for business operations. However, it is worth noting that the property needed to be used as a business (not for a business); that’s an important distinction to make. People who worked from home most likely won’t need to fill out IRS Form 4797 when they sell.

According to the IRS guide, Form 4797 may also be used to report:

  • Any involuntary conversions of real estate and capital assets

  • The disposition of noncapital assets

  • The disposition of capital assets which weren’t included on Schedule D

  • The gain or loss for partners and S corporation shareholders from certain section 179 property dispositions by partnerships and S corporations

  • The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less

  • Gains or losses treated as ordinary gains or losses, if you are a trader in securities or commodities and made a mark-to-market election under Internal Revenue Code section 475(f)


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Form 4797 instructions

What Is The Difference Between Schedule D & Form 4797?

The differences between Schedule D and Form 4797 are almost negligible to anyone unfamiliar with the IRS tax code. As a result, most people aren’t sure which IRS form they are expected to fill out when they sell a property that was used as a business. Both Schedule D and Form 4797 are intended to acknowledge capital gains; however, that’s where the differences stop. Whereas Schedule D forms are used to report personal gains, Form 4797 is used to report profits from real estate transactions centered on business use.

Form 4797 Instructions

Filing Form 4797 with the IRS isn’t as complicated as it sounds, nor is it as difficult as many people initially assume. Thankfully, the process is as simple as obtaining a copy of the form through the IRS website; it’s also possible to talk to your local tax preparer for the form. Either way, the process starts with having the form in hand. Start by filling out the generic information on the form: your name, taxpayer identification number (social security number), and anything else to identify who you are. This information will change depending on whether the filer is filing as an individual or a corporation.

Once all of the correct personal (or corporate) information has been entered, Line 1 is reserved for any proceeds or exchanges reported on a 1099. The rest of Form 4797 will look a lot like the following:

Part I: Sales or Exchanges of Property

Part One will cover Line 2 through Line 9 and deals primarily with the subject property’s sale and exchange.

Line 2 is where tax filers will record any properties they purchased or sold and held for longer than a year. There is no need for multiple forms, as Line 2 offers plenty of space to record each property that was bought or sold (and the corresponding information). At this point, filers will need to disclose specific dates of sales and purchase, prices, depreciation (if any), maintenance costs, and the exact amount of capital gains and losses realized.

Amounts will be added to their corresponding lines:

  • Line 3: This line is reserved for any gains listed on line 42 of Form 4684.

  • Line 4: This line will identify any Section 1231 gains from installment sales.

  • Line 5: Like-kind exchanges reported on Form 8824 which resulted in either Section 1231 gains or losses will be recorded here.

  • Line 6: Any gains reported on Line 32 of the tax return (except those resulting from casualty or theft) will be reported here.

  • Line 7: Add up all gains and losses from lines 2-6 and put the amount here.

  • Line 8: This line is meant for non-recaptured Section 1231 losses from any previous year.

  • Line 9: In the event you had non-recaptured Section 1231 losses, subtract the specific amount from Line 7’s total and put the amount here.

Part II: Ordinary Gains and Losses

Not unlike Part One, Part Two will require information about the sale and exchange of property in the respective tax filing year. However, unlike Part One, Part Two will only deal with physical real estate owned for less than one year. The same information from the previous section will apply to Part Two (Lines 11-18), but only for properties in which owners realized short-term capital gains and losses.

Part III: Gain From Disposition of Property

Part Three of Form 4797 is the largest, and consists of 14 lines that require very specific information. For example, owners will need to report gains on Line 19 if they were realized under any of the following Sections:

  • Section 1245

  • Section 1250

  • Section 1252

  • Section 1254

  • Section 1255

Previous owners who report gains under any of these sections will need to accompany them with the date they acquired the property and the date it was sold (also on Line 19). Lines 20-24 will consist of the gross sale price, cost basis, depreciation, and total gain for the subject properties in question.

Lines 25-29 require previous owners who realized gains or losses to fill out the information about each property, as it applies to the tax code. Finally, Lines 30-32 will ask applicants to add the appropriate lines to reveal the total applicable gains.

Part IV: Recapture Amounts

Part Four consists of four lines (Lines 33-35) and deals primarily with recapture amounts. To be clear, a recapture amount is a provision by which the IRS may collect taxes on any profitable sale applicants use to offset their taxable income. Once Part You is properly filled out, applicants may attach the completed Form 4797 to their tax return.

Summary

IRS Form 4797 instructions are, at the very least, complicated and hard for the average investor/business owner to comprehend. The form is filled with nuanced jargon that most people have never heard of before, let alone understand enough to file their taxes appropriately. Nonetheless, Form 4797 is necessary for anyone who has sold or exchanged physical real estate they used for a business. This article was intended to simplify the process and hopefully make Form 4794 slightly more bearable. With a step-by-step walkthrough, those who realized capital gains or losses on business properties in the current tax year should have one less thing to worry about when it comes time to file.

Better yet, business owners and investors need to work with properly trained tax professionals and Certified Personal Accountants who are well-versed on the intricacies of Form 4797; then, and only then, will they be able to rest assured their taxes were filed properly.

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