How to Fill Out Form 4797 Part 1 for Business Property

Form 4797, Sales of Business Property, is an IRS document for reporting the sale or exchange of property used in a business. This can include real estate, machinery, or vehicles. The form is structured into several parts to handle different types of property and transactions. This article will focus on how to correctly complete Part 1 of the form.

Identifying Property Reported in Part 1

Part 1 of Form 4797 is designated for reporting the sale or exchange of Section 1231 property. This category includes real or depreciable property used in a trade or business and held for more than one year. Common examples of Section 1231 assets are buildings, machinery, equipment, and vehicles. Land used in a business context also falls under this classification.

It is important to distinguish these assets from inventory or property held primarily for sale to customers, which are not reported in this section. If the property was held for one year or less, the transaction is reported in Part II of Form 4797 as an ordinary gain or loss.

Information Needed to Complete Part 1

You will need a clear description of the property sold, the date it was originally acquired, and the date of its sale. You must also have the gross sales price, which is the total amount received from the sale. Alongside this, you need the property’s cost or other basis.

Basis typically starts with the original cost of the asset and is then adjusted for factors like improvements or depreciation. You will need detailed records of all depreciation allowed or allowable on the property since it was placed into service. For instance, any gain from the sale of depreciable property calculated in Part III of Form 4797 is carried over to Part 1. Similarly, gains from installment sales reported on Form 6252 or from like-kind exchanges on Form 8824 must be determined before completing Part 1.

Completing the Columns of Part 1

Column (a) requires a brief description of the property. Columns (b) and (c) are for the dates the property was acquired and sold, respectively.

Next, in column (d), you will enter the gross sales price. Column (e) is for the depreciation that was allowed or allowable during the time you owned the asset. In column (f), you report the cost or other basis of the property, plus any improvements and expenses related to the sale. The gain or loss for each transaction is then calculated for column (g) by subtracting the amounts in columns (e) and (f) from the gross sales price in column (d).

After detailing individual transactions on line 2, you will incorporate gains from other forms. Line 3 is for gains from Form 4684 (Casualties and Thefts), while lines 4 and 5 are for gains from Form 6252 and Form 8824, respectively. All gains and losses reported on lines 2 through 6 are then combined on line 7 to determine the net Section 1231 gain or loss for the year.

Tax Treatment of Net Section 1231 Gains

If the result is a net gain, it is typically treated as a long-term capital gain. This is advantageous for taxpayers, as long-term capital gains are generally taxed at lower rates than ordinary income. The specific rate depends on the taxpayer’s overall income level.

A significant rule that can alter this treatment is the five-year lookback rule for nonrecaptured Section 1231 losses. If you reported any net Section 1231 losses during that period, your current year’s Section 1231 gain will be treated as ordinary income to the extent of those prior, unrecaptured losses. Ordinary income is taxed at standard, typically higher, marginal tax rates.

For example, imagine you have a $15,000 net Section 1231 gain in the current year. Two years ago, you had a nonrecaptured net Section 1231 loss of $10,000. Under the lookback rule, $10,000 of your current gain would be recharacterized as ordinary income. The remaining $5,000 would retain its character as a long-term capital gain.