Even if a property is exchanged and reported using Form 8824, if it is the sale of business property, the owner of the relinquished property must also file Form 4797 with the IRS in order to accurately report the total value of their holdings.
What Should I Identify in Form 4797?
Use Form 4797 to identify:
- The sale or exchange of:
- Real property used in your trade or business;
- Depreciable and amortizable tangible property used in your trade or business (however, see Disposition of depreciable property not used in trade or business, later);
- Oil, gas, geothermal, or other mineral properties; and
- Section 126 property.
- The involuntary conversion (from other than casualty or theft) of property used in your trade or business and capital assets held more than 1 year for business or profit (however, see Disposition of depreciable property not used in trade or business, later).
- The disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of your trade or business).
- The disposition of capital assets not reported on Schedule D.
- The gain or loss (including any related recapture) 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) of the Internal Revenue Code, 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 section 475(f) of the Internal Revenue Code.
- Election to defer a qualified section 1231 gain invested in a QOF. See the Instructions for Form 4797.
What Qualifies to Be Reported in Form 4797?
The IRS explains: “Generally, gain from the sale or exchange of depreciable property not used in a trade or business but held for investment or for use in a not-for-profit activity is capital gain. Generally, the gain is reported on Form 8949 and Schedule D. However, part of the gain on the sale or exchange of the depreciable property may have to be recaptured as ordinary income on Form 4797. Use Part III of Form 4797 to figure the amount of ordinary income recapture. The recapture amount is included on line 31 (and line 13) of Form 4797. See the instructions for Form 4797, Part III.”
For more information, read the IRS document Publication 554: Sales and Dispositions of Assets § Form 4797.