What Is Form 4797 and What Is it Used For?

The upcoming tax season means it’s time to prepare the paperwork necessary for filing with the IRS by April 18, 2022 (or April 19, 2022, for those residing in Maine or Massachusetts). If you own and operate a business or are a property-owning investor, one form that might cross your desk is Form 4797.

As can be expected, Form 4797, “Sales of Business Property,” is filed when reporting the sale or exchange of business property. But there are additional scenarios to understand when it comes to filling out—and turning in—this particular form.

The Broad View

The main purpose of Form 4797 is to report gains that occur from the sale or exchange of business property. As implied from the above, such property could include that used to generate rental income. Also in this category are properties used for industrial, agricultural, or extraction services.

Did you own cattle for trade or business, and sold it at a gain or loss? It needs to be reported on Form 4797. Did you dispose of natural resources (i.e., minerals, gas, or oil), resulting in a loss? Again, that needs to be reported on the form.

You also need to fill out Form 4797 in the following cases:

  • The involuntary conversion of property and capital assets (from other than casualty or theft)
  • The sale of noncapital assets
  • The sale of capital assets not reported on Schedule D
  • The gain or loss incurred by partners and/or S corporation shareholders from certain section 179 property dispositions made by those partnerships and/or S corps
  • When computing recapture amounts under sections 179 and 280F(b)(2) if business use of section 179 (or listed property) decreases to 50% or less
  • If you are a trader involved with securities or commodities, and make a mark-to-market election under IRC Revenue Code section 475(f), the gains or losses treated as ordinary gains or losses

An Additional Consideration

Another interesting factoid about Form 4797 is if you work from home as an independent contractor or entrepreneur, and sell that house. You might need to fill out this form, and report the sale of the part you used for business. According to the IRS, it’s possible that gain or loss on the personal part of that property is considered a capital gain. By the same token, a gain or loss on that part of the home used for business might be regarded as an ordinary gain or loss.

Caveat Investor

The issue with Form 4797 is that it encompasses a broad range of defined “business property.” It’s important to know if your property is actually considered “business” when it comes to its sale. As mentioned above, any gain or loss on the part of your primary residence used for business might need to be reported on Form 4797.

You might also need to refer to other information, such as Section 1231 or information from a Form 1099-B for the information necessary to complete a Form 4797. This is why it’s a good idea to consult your tax professional to determine the need to fill out this form.

This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. It should also not be construed as advice, meeting the particular investment needs of any investor. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation.

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