Form 4797: Sales of Business Property

What it is

Form 4797 (Sales of Business Property) is an IRS form used to report gains or losses from the sale, exchange, or involuntary conversion of business property. This includes property used in a trade or business, property held to produce rental income, and certain natural resource properties (oil, gas, geothermal, minerals).

Who must file

File Form 4797 if you sell or otherwise dispose of business property, including:
* Property used in a trade or business or held for rental income
* A home or other property that was used partly for business
* Depreciable property subject to recapture rules
* Capital assets related to business activities that are not reported on Schedule D

Flow-through entities (partnerships, S corporations) report dispositions on Form 4797 and the resulting gain or loss generally flows through to partners or shareholders on their schedules or K‑1s; corporations report the results on their corporate returns.

Note: If property was used partly as a primary residence, some gain may qualify for personal residence exclusions — consult the rules that apply to mixed-use properties.

What to report

When completing Form 4797, provide:
* Description of the property
* Date acquired (purchase date)
* Date sold or transferred
* Gross sales price (amount realized)
* Cost or other basis (adjusted for improvements and prior depreciation)
* Depreciation previously claimed (accumulated depreciation)

Gain or loss is computed by comparing the amount realized with the property’s adjusted basis (cost minus accumulated depreciation and other adjustments).

Overview of the form’s parts

Form 4797 is organized into four parts:

• Part I — Sales or exchanges of property used in a trade or business and involuntary conversions (generally for depreciable property held more than one year).
• Part II — Ordinary gains and losses (generally for property held one year or less and certain losses treated as ordinary).
• Part III — Gain from disposition of property under Sections 1245, 1250, 1252, 1254 and 1255 (capital asset dispositions held more than one year that require special treatment).
• Part IV — Recapture amounts under Sections 179 and 280F(b)(2) when business use drops to 50% or less.

Parts of Form 4797 may generate ordinary income (for depreciation recapture) or capital gain treatment depending on the property type and tax code sections involved.

How Form 4797 differs from other forms

• Schedule D: Used to report capital gains and losses from personal investments. Form 4797 reports gains and losses from business or income-producing real estate and depreciable business property.
• Form 8949: Used to report sales and dispositions of capital assets when detailed reporting is required (for example, when adjustments to gain/loss must be shown). Most business real estate dispositions are reported directly on Form 4797 unless Form 8949 is specifically required.

Deferring tax on a business sale

You generally cannot permanently avoid capital gains tax, but you may defer it in certain situations. One common deferral strategy is reinvesting gains in a qualified opportunity fund (QOF), subject to the QOF rules and timelines.

Filing and resources

• Complete the relevant parts of Form 4797 and attach it to the taxpayer’s income tax return.
• Form pages and official instructions are available on the IRS website; consult the instructions for line-by-line guidance and details on tax code sections that affect recapture and character of gain.

Bottom line

Form 4797 is the primary form for reporting sales, exchanges, and certain conversions of business and income-producing property. Properly classifying property, accounting for depreciation and adjusted basis, and identifying any recapture rules are essential to determining whether the result is ordinary income or capital gain and to completing the correct parts of the form.

Sources: IRS — Form 4797 and Instructions for Form 4797.