DEFINITION of Form 4797
Form 4797 is a tax form distributed by the Internal Revenue Service (IRS) and used to report gains made from the sale or exchange of business property, including but not limited to property used to generate rental income, and property used for industrial, agricultural, or extractive resources.
BREAKING DOWN Form 4797
Business property on Form 4797 may refer to property purchased in order to produce rental income or may refer to a home that was used as a business. Gains made from the sale of oil, gas, geothermal or mineral properties are also reported on Form 4797. If a piece of property was used partially for business purposes or to produce income while also serving as a primary residence, gains from the sale of that property may be eligible for tax exclusion. This is typically the case for self-employed persons and independent contractors who generate their income from home.
Depending on how a piece of property was used (outlined in IRS Publication 463, Section 179), depreciation may adjust the value of the property. It may reduce the book value of the capital asset which, in turn, reduces the taxable gain. Businesses selling their capital assets must enter into Form 4797 information such as description of the property, purchase date, sale or transfer date, cost of purchase, gross sales price, and the depreciation amount which is added to the sales price. The net profit or loss from the transfer or sale of the business property is determined by subtracting the cost basis or purchase price from the sum of sales price and depreciation.
Form 4797 has three parts. In general, most depreciable property held for more than a year are recognized under Part I – Sales or Exchanges of Property Used in a Trade or Business and Involuntary Conversions From Other Than Casualty or Theft. Property held for a year or less and sold for a loss is recorded in Part II – Ordinary Gains and Losses. Capital assets held for more than a year and sold for a profit fall in the section labeled Part III – Gain From Disposition of Property Under Sections 1245, 1250, 1252, 1254, and 1255. For a corporation or partnership, the total amount entered on Line 17, Part II, must be added to the gross income line on Schedule C. Part IV is labeled Recapture Amounts Under Sections 179 and 280F(b)(2) When Business Use Drops to 50% or Less. (Read our term definition of Listed Property).
When a business, such as a flow-through entity like a partnership or an S Corporation, sells property, partners and shareholders may experience a tax event (a gain or loss) when the property is sold and a form 4797 is filed.
The disposition of capital assets not reported on Schedule D must be reported on Form 4797.