What Is Form 4797: Sales of Business Property?

Form 4797, Sales of Business Property, is an Internal Revenue Service (IRS) form used to report the gain or loss from the sale, exchange, or involuntary conversion of assets used in a trade or business. Its purpose is to separate these transactions from the sale of personal capital assets, like stocks, which are reported on Schedule D, because the tax treatment of business property is complex and involves depreciation rules. The form ensures that gains and losses are correctly categorized, as some may be treated as ordinary income while others might qualify for more favorable capital gain tax rates.

When to Use Form 4797

The most common trigger is the outright sale or exchange of business assets. For example, a landscaping company that sells one of its commercial mowers or a restaurant that sells its delivery vehicle would report these transactions on Form 4797. This applies to sole proprietors, partnerships, and corporations that dispose of property they have used in their operations.

Another scenario is the involuntary conversion of business property. This occurs when property is lost due to a casualty, such as a fire or natural disaster, or from a theft. If a business receives an insurance payment for a destroyed piece of equipment, the resulting gain or loss is reported on this form. If property is condemned by a government authority and the business is compensated, that transaction is also reported here.

The form is also used for the disposition of certain non-capital assets that are not inventory. The sale of goods a business holds for sale to customers is business income reported elsewhere, as Form 4797 is for the property used to run the business itself. Since the Tax Cuts and Jobs Act of 2017, like-kind exchange treatment is limited to real property, so trading depreciable personal property is now a taxable event that must be reported on Form 4797.

Property Types Reported on Form 4797

Form 4797 deals with Section 1231 property, which includes real property and depreciable personal property used in a business and held for more than one year. The sale of assets like a factory building, office furniture, or a company car falls under this category, provided the holding period is met.

Depreciation recapture can recharacterize a portion of a gain from a capital gain to ordinary income. This is where Section 1245 and Section 1250 property rules come into play. Section 1245 property covers tangible personal property, such as machinery, equipment, and vehicles. When a Section 1245 asset is sold at a gain, the portion of the gain equal to the total depreciation previously deducted is “recaptured” and taxed as ordinary income.

For instance, if a business bought a machine for $50,000, claimed $20,000 in depreciation (making the adjusted basis $30,000), and then sold it for $55,000, the first $20,000 of the gain is treated as ordinary income. The remaining $5,000 of the gain would be a Section 1231 gain.

Section 1250 property refers to depreciable real property, like an office building or warehouse. The recapture rules for Section 1250 property are less stringent than those for Section 1245. For most real property placed in service after 1986 and depreciated using the straight-line method, there is no recapture of depreciation as ordinary income upon its sale, though different rules can apply if an accelerated depreciation method was used.

Information Needed to Complete Form 4797

You will need a clear description of the property, such as “delivery truck” or “office building,” along with the date it was acquired and the date it was sold. The holding period is a determining factor in how gains or losses are treated.

The core financial details needed are:

• The gross sales price received
• The property’s original cost or other basis
• The total amount of depreciation that was allowed or allowable
• Any expenses from the sale, such as advertising costs or commissions

The total depreciation is subtracted from the original cost to determine the property’s adjusted basis at the time of sale. Having documents like purchase receipts, sales contracts, and prior tax returns with depreciation schedules organized beforehand simplifies the process.

How Gains and Losses Are Treated

Any gain identified as ordinary income due to recapture is transferred from Form 4797 to the taxpayer’s main tax return, typically Form 1040, where it is taxed at ordinary income tax rates.

The remaining gains and losses, known as Section 1231 gains and losses, are netted against each other. If the result is a net Section 1231 gain for the year, it is treated as a long-term capital gain. This net gain then flows from Form 4797 to Schedule D (Capital Gains and Losses), where it can be taxed at lower long-term capital gains rates.

Conversely, if the netting of Section 1231 transactions results in a net loss, it is treated as an ordinary loss. This ordinary loss is fully deductible against other types of income, such as wages or business income, on Form 1040. This treatment is advantageous because ordinary losses are not subject to the annual $3,000 deduction limit that applies to net capital losses.