Have you recently sold a property used solely for business purposes and which is not been your primary residence for the past six months? If you do, you will have to file Internal Revenue Service or IRS Form 4797.
When you are in the real estate business, you need to know what tax forms and paperwork are required in filing tax returns. The IRS has countless forms that sometimes become confusing for real estate investors and ordinary tax filers. Form 4797 is just one of the forms that you need to understand and learn how to fill up. So, why do you have to fill out Form 4797?
What Is Form 4797?
Form 4797 (Sales of Business Property) is one of the tax forms distributed and required by the IRS along with your tax returns. Anyone who has sold physical real estate used solely for business purposes must file Form 4797 IRS requirements. If you sold any property that generated rental income or cash flow, you must file Form 4797. You must file it along with your tax return the same year you sold your business property.
You will need to calculate any gain or loss you made from the sale and include it in the Form 4797 information, along with the following:
- Description of Property
- Date of Sale or Transfer
- Purchase Date
- Purchase Price
- Gross Sales Price
- Depreciation Amount
When is Form 4797 used?
Form 4797 is a two-page document containing four parts. The form is exclusively used to report the sale and profits of business property transactions. Property types generate rental income and property used for agricultural, industrial, and extractive resources like minerals, oil, etc.
If you are self-employed and work from home, you use part of your home for business. If you sell your home, you may be able to exclude part or all of the gain you realized from selling your house if you meet certain exclusion conditions.
Follow the IRS instructions for form 4797 to report the following:
- Sale of real property used in your trade or business
- Depreciable and amortizable tangible property used in your business. Tangible and depreciable property are things you use in your business that gets old and has to be replaced.
- Involuntary conversions of capital assets and real estate (except those assets lost to theft or casualty)
- The disposition of noncapital assets (or assets that don’t make money)
- The disposition of capital assets included on Schedule D or Form 1040.
- Election to defer a qualified section 1231 gain. Sometimes, people don’t want to pay taxes on the profits they make from selling things immediately, so they choose to defer those taxes.
- Recapture amounts that are computed under sections 179 and 280F(b)(2). This applies if the property listed for business use of section 179 decreased below 50 percent.
- Ordinary gains and losses
Difference between Form 4797 and Schedule D
Real estate investors sometimes mix up IRS Form 4797 and Schedule D forms. If you are unfamiliar with the IRS tax codes and forms, you would be confused about which form to fill up when you sell a property. You must complete the correct form 4797 sale of rental property to ensure you’re paying the correct taxes with the IRS.
Both forms are used to report capital gains. However, here is the difference. You use the tax 4797 form to report profits from your real estate transactions for business use. You fill out Schedule D forms to report personal gains in general. If you are filling out Schedule D, you will be referred to Form 4797 if you report any gains or profits from selling business or property.
Start filling up tax Form 4797 as soon as possible after selling a property used for business, following IRS 4797 instructions. When tax filing season comes along, you can check it off the list from the hundred and one things on your plate. The 12-page IRS Form 4797 instructions look complicated, filled with unfamiliar jargon that could overwhelm the average business owner or real estate, investor.
If you find filing Form 4797 difficult, especially if you have multiple business properties, you can ask for help. Trained professionals and Certified Personal Accountants can take the hassle off your hands so you can focus more on your real estate ventures.