2003 Department of the Treasury
Internal Revenue Service
Instructions for Form 4797
Sales of Business Property
(Also Involuntary Conversions and Recapture Amounts
Under Sections 179 and 280F(b)(2))
Section references are to the Internal Revenue Code unless otherwise noted.
• The gain or loss (including any related • If you sold property on which you
General Instructions recapture) for partners and S corporation claimed investment credit, see Form
shareholders from certain section 179 4255, Recapture of Investment Credit, to
Changes To Note property dispositions by partnerships find out if you must recapture some or all
• The Jobs and Growth Tax Relief (other than electing large partnerships) of the credit.
Reconciliation Act of 2003 reduced the and S corporations.
capital gains tax rates for noncorporate • The computation of recapture amounts Special Rules
taxpayers for sales, exchanges, or under sections 179 and 280F(b)(2) when
conversions of assets (including the business use of section 179 or listed At-Risk Rules
installment payments received) after May property decreases to 50% or less. If you report a loss on an asset used in an
5, 2003. Because the change in the activity for which you are not at risk, in
capital gains rates may affect the tax whole or in part, see the instructions for
treatment of section 1231 gains and Other Forms To Use Form 6198, At-Risk Limitations. Also, see
losses, noncorporate taxpayers (and S • Use Form 4684, Casualties and Thefts, Pub. 925, Passive Activity and At-Risk
corporations) with a net section 1231 gain to report involuntary conversions from Rules. Losses from passive activities are
may need to use column (h) in Part I to casualties and thefts. subject first to the at-risk rules and then to
report post-May 5, 2003, gains and losses • Use Form 8824, Like-Kind Exchanges, the passive activity rules.
(see the footnote on Form 4797, Part I). to report exchanges of qualifying
• Partnerships (other than electing large business or investment property for
Depreciable Property and Other
partnerships), S corporations, and their property of a like kind. For exchanges of Property Disposed of in the
partners and shareholders must follow property used in a trade or business (and Same Transaction
revised instructions for reporting the other noncapital assets), enter the gain or If you disposed of both depreciable
disposition of property for which a section (loss) from Form 8824, if any, on line 5 or property and other property (for example,
179 expense deduction was claimed in a 16. a building and land) in the same
prior year (see the line 22 instructions on
page 5). Where To Make First Entry for Certain Items Reported on This Form
• Partners and shareholders must follow (b) (c)
revised instructions for reporting section (a)
Held 1 year Held more
179 expense deduction recapture Type of property
or less than 1 year
reported by a partnership or S corporation
with a fiscal year beginning in 2002 (see 1 Depreciable trade or business property:
the line 17 instructions on page 4). a Sold or exchanged at a gain Part II Part III (1245,
1250)
Purpose of Form b Sold or exchanged at a loss Part II Part I
Use Form 4797 to report: 2 Depreciable residential rental property:
• The sale or exchange of: a Sold or exchanged at a gain Part II Part III (1250)
1. Property used in your trade or b Sold or exchanged at a loss Part II Part I
business; 3 Farmland held less than 10 years upon which soil, water,
2. Depreciable and amortizable or land clearing expenses were deducted:
property; a Sold at a gain Part II Part III (1252)
3. Oil, gas, geothermal, or other b Sold at a loss Part II Part I
mineral properties; and 4 Disposition of cost-sharing payment property described
4. Section 126 property. in section 126 Part II Part III (1255)
• The involuntary conversion (from other Held less than Held 24 months
5 Cattle and horses used in a trade or business for draft,
than casualty or theft) of property used in 24 months or more
breeding, dairy, or sporting purposes:
your trade or business and capital assets
held in connection with a trade or a Sold at a gain Part II Part III (1245)
business or a transaction entered into for b Sold at a loss Part II Part I
profit. c Raised cattle and horses sold at a gain Part II Part I
• The disposition of noncapital assets Held less than Held 12 months
(other than inventory or property held 6 Livestock other than cattle and horses used in a trade or
business for draft, breeding, dairy, or sporting purposes: 12 months or more
primarily for sale to customers in the
ordinary course of your trade or a Sold at a gain Part II Part III (1245)
business). b Sold at a loss Part II Part I
• The disposition of capital assets not c Raised livestock sold at a gain Part II Part I
reported on Schedule D.
Cat. No. 13087T
transaction and realized a gain, you must trading business (including those marked dispose of your entire interest in an
allocate the amount realized between the to market) are treated as ordinary income activity, you may elect to increase the
two types of property based on their and losses, instead of capital gains and basis of the credit property by the original
respective fair market values (FMVs) to losses. As a result, the lower capital gain basis reduction of the property to the
figure the part of the gain to be tax rates and the limitation on capital extent that the credit has not been
recaptured as ordinary income because losses do not apply. allowed because of the passive activity
of depreciation. The disposition of each • The gain or loss from each security or rules. Make the election on Form
type of property is reported separately in commodity held in connection with your 8582-CR, Passive Activity Credit
the appropriate part of Form 4797 (for trading business (including those marked Limitations, or Form 8810. No basis
example, for property held more than 1 to market) is reported on Form 4797, line adjustment may be elected on a partial
year, report the sale of a building in Part 10 (see the instructions for line 10 on disposition of your interest in an activity.
III and land in Part I). page 4).
• The wash sale rule does not apply to Recapture of Preproductive
Disposition of Assets That securities or commodities held in Expenses
Constitute a Trade or Business connection with your trading business. If you elected out of the uniform
If you sell a group of assets that makes For details on the mark-to-market capitalization rules of section 263A, any
up a trade or business, both you and the election and how to make it, see Pub. plant that you produce is treated as
buyer generally must allocate the total 550, Investment Income and Expenses; section 1245 property. For dispositions of
sales price to the assets transferred and sections 475(e) and 475(f); and Rev. plants reportable on Form 4797, enter the
file Form 8594, Asset Acquisition Proc. 99-17, 1999-1 C.B. 503. You can recapture amount taxed as ordinary
Statement. find Rev. Proc. 99-17 on page 52 of income on line 22 of Form 4797. See
Internal Revenue Bulletin 1999-7 at Pub. 225, Farmer’s Tax Guide, for
Installment Sales www.irs.gov/pub/irs-irbs/irb99-07.pdf. details.
If you sold property at a gain and you will
receive a payment in a tax year after the Involuntary Conversion of Section 197(f)(9)(B)(ii) Election
year of sale, you generally must report Property If you elected under section
the sale on the installment method unless You may not have to pay tax on a gain 197(f)(9)(B)(ii) to recognize gain on the
you elect not to do so. from an involuntary or compulsory disposition of a section 197 intangible and
Use Form 6252, Installment Sale conversion of property. See Pub. 544, to pay a tax on that gain at the highest tax
Income, to report the sale on the Sales and Other Dispositions of Assets, rate, include the additional tax on Form
installment method. Also use Form 6252 for details. 1040, line 41 (or the appropriate line of
to report any payment received during other income tax returns). On the dotted
your 2003 tax year from a sale made in Exclusion of Gain on Sale of a line next to that line, enter “197” and the
an earlier year that you reported on the Home Used for Business amount. The additional tax is the amount
installment method. If the property sold was used for business that, when added to any other income tax
To elect out of the installment method, or to produce rental income and also was on the gain, equals the gain multiplied by
report the full amount of the gain on a owned and used as your home during the the highest tax rate.
timely filed return (including extensions). 5-year period ending on the date of the Rollover of Gain From
If you timely filed your tax return without sale, you may be able to exclude part or
all of the gain figured on Form 4797. For Empowerment Zone Assets
making the election, you can still make
the election by filing an amended return details on the exclusion (including how to If you sold a qualified empowerment zone
within 6 months of the due date of your figure the amount of the exclusion), see asset that you held for more than 1 year,
return (excluding extensions). Write “Filed Pub. 523, Selling Your Home. you may be able to elect to postpone part
pursuant to section 301.9100-2” at the top or all of the gain that you would otherwise
If the property was held more than 1
of the amended return. include on Form 4797, Part I. If you make
year, complete Part III to figure the
the election, the gain on the sale
See Pub. 537, Installment Sales, for amount of the gain. Do not take the
generally is recognized only to the extent,
more details. exclusion into account when figuring the
if any, that the amount realized on the
gain on line 24. If line 22 includes
Traders Who Made a depreciation for periods after May 6,
sale exceeds the cost of qualified
Mark-To-Market Election empowerment zone assets (replacement
1997, you cannot exclude gain to the
property) you purchased during the
A trader in securities or commodities may extent of that depreciation. On line 2 of
60-day period beginning on the date of
elect under section 475(f) to use the Form 4797, write “Section 121 exclusion,”
the sale. The following rules apply.
mark-to-market method to account for and enter the amount of the exclusion as
securities or commodities held in a (loss) in column (g) and, if applicable,
• No portion of the cost of the
replacement property may be taken into
connection with a trading business. Under as a (loss) in column (h).
account to the extent the cost is taken
this method of accounting, any security or If the property was held for 1 year or into account to exclude gain on a different
commodity held at the end of the tax year less, report the sale and the amount of empowerment zone asset.
is treated as sold (and reacquired) at its
FMV on the last business day of that
the exclusion, if any, in a similar manner • The replacement property must qualify
on line 10 of Form 4797. as an empowerment zone asset with
year.
Passive Loss Limitations respect to the same empowerment zone
Unless you are a new taxpayer, the as the asset sold.
election must be made by the due date If you have an overall loss from passive • You must reduce the basis of the
(not including extensions) of the tax activities and you report a loss on an replacement property by the amount of
return for the year prior to the year for asset used in a passive activity, use postponed gain.
which the election becomes effective. Form 8582, Passive Activity Loss • This election does not apply to any gain
If you are a trader in securities or Limitations, or Form 8810, Corporate (a) treated as ordinary income or (b)
commodities with a mark-to-market Passive Activity Loss and Credit attributable to real property, or an
election under section 475(f) in effect for Limitations, to see how much loss is intangible asset, which is not an integral
the tax year, the following special rules allowed before entering it on Form 4797. part of an enterprise zone business.
apply. You cannot claim unused passive • The District of Columbia enterprise
• Gains and losses from all securities or activity credits when you dispose of your zone is not treated as an empowerment
commodities held in connection with your interest in an activity. However, if you zone for this purpose.
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• The election is irrevocable without IRS • Sales of securities or commodities for you (in the case of letters,
consent. reported to you for 2003 on Forms memoranda, or similar property), or (c)
See Pub. 954 for the definition of 1099-B (or substitute statements) that you received from someone who created
empowerment zone and enterprise zone are including on line 10 because you are them or for whom they were created, as
business. You can find out if your a trader with a mark-to-market election mentioned in (a) or (b), in a way that
business is located within an under section 475(f) in effect for the tax entitled you to the basis of the previous
empowerment zone by using the year. See Traders Who Made a owner (such as by gift); or
RC/EZ/EC Address Locator at http:// Mark-To-Market Election on page 2 and • U.S. Government publications,
hud.esri.com/locateservices/ezec. the instructions for line 10 on page 4. including the Congressional Record, that
Qualified empowerment zone assets you received from the Government other
are: Part I than by purchase at the normal sales
• Tangible property, if: Use Part I to report section 1231 price or that you got from someone who
transactions that are not required to be had received it in a similar way, if your
1. You acquired the property after basis is determined by reference to the
December 21, 2000, reported in Part III. The following are
section 1231 transactions. previous owner’s basis.
2. The original use of the property in
the empowerment zone began with you, • Sales or exchanges of real or Line 8, Column (g)
and depreciable property used in a trade or
business and held for more than 1 year. Your net section 1231 gain on line 7,
3. Substantially all of the use of the column (g), is treated as ordinary income
property, during substantially all of the To figure the holding period, begin
counting on the day after you received the to the extent of your “nonrecaptured
time that you held it, was in your section 1231 losses.” Your nonrecaptured
enterprise zone business; and property and include the day you
section 1231 losses are your net section
• Stock in a domestic corporation or a disposed of it.
capital or profits interest in a domestic • Cutting of timber that the taxpayer 1231 losses deducted during the 5
elects to treat as a sale or exchange preceding tax years that have not yet
partnership, if: been applied against any net section
under section 631(a).
1. You acquired the stock or • Disposal of timber with a retained 1231 gain to determine how much net
partnership interest after December 21, economic interest that is treated as a sale section 1231 gain is treated as ordinary
2000, solely in exchange for cash, from under section 631(b). income under this rule.
the corporation at its original issue • Disposal of coal (including lignite) or Example. You had net section 1231
(directly or through an underwriter) or domestic iron ore with a retained losses of $4,000 and $6,000 in 1998 and
from the partnership; economic interest that is treated as a sale 1999, respectively, and net section 1231
2. The business was an enterprise under section 631(c). gains of $3,000 and $2,000 in 2002 and
zone business (or a new business being • Sales or exchanges of cattle and 2003, respectively. The 2003 net section
organized as an enterprise zone horses, regardless of age, used in a trade 1231 gain of $2,000 is entered on line 7,
business) as of the time you acquired the or business for draft, breeding, dairy, or column (g), and the nonrecaptured net
stock or partnership interest; and sporting purposes and held for 24 months section 1231 losses of $7,000 ($10,000
3. The business qualified as an or more from acquisition date. net section 1231 losses minus the $3,000
enterprise zone business during • Sales or exchanges of livestock other that was applied against the 2002 net
substantially all of the time during which than cattle and horses, regardless of age, section 1231 gain) are entered on line 8,
you held the stock or partnership interest. used in a trade or business for draft, column (g). The entire $2,000 net section
How to report. Report the entire gain breeding, dairy, or sporting purposes and 1231 gain on line 7, column (g), is treated
realized from the sale as you otherwise held for 12 months or more from as ordinary income and is entered on line
would without regard to the election. On acquisition date. 12 of Form 4797. For recordkeeping
Form 4797, line 2, enter “Section 1397B Note: Livestock does not include poultry, purposes, the $4,000 loss from 1998 is all
Rollover” in column (a) and enter as a chickens, turkeys, pigeons, geese, other recaptured ($3,000 in 2002 and $1,000 in
(loss) in column (g) and, if applicable, as birds, fish, frogs, reptiles, etc. 2003), and you have $5,000 of section
a (loss) in column (h), the amount of gain 1231 losses from 1999 left to recapture
included on Form 4797 that you are • Sales or exchanges of unharvested ($6,000 minus the $1,000 recaptured this
electing to postpone. If you are reporting crops. See section 1231(b)(4). year).
the sale directly on Form 4797, line 2, use • Involuntary conversions of trade or
the line directly below the line on which business property or capital assets held Figuring the Prior Year Losses
you reported the sale. more than 1 year in connection with a You had a net section 1231 loss if section
trade or business or a transaction entered 1231 losses exceeded section 1231
See section 1397B for more details. into for profit. These conversions may gains. Gains are included only to the
result from (a) part or total destruction, (b) extent taken into account in figuring gross
theft or seizure, or (c) requisition or income. Losses are included only to the
condemnation (whether threatened or
Specific Instructions carried out). If any recognized losses
extent taken into account in figuring
taxable income except that the limitation
To show losses, enclose figures in were from involuntary conversions from on capital losses does not apply.
(parentheses). fire, storm, shipwreck, or other casualty or
If you disposed of property you from theft and the losses exceed the Line 8, Column (h)
acquired by inheritance, enter recognized gains from the conversions, Make an entry on line 8, column (h), only
“INHERITED” in column (b) instead of do not include any gains or losses from if line 9, column (g), is more than zero.
the date you acquired the property. such conversions when figuring your net Figure the amount to enter as follows.
section 1231 losses. • If line 7, column (h), is zero or less,
Section 1231 transactions do not enter zero on line 8, column (h).
Line 1 include sales or exchanges of: • If line 7, column (h), is more than zero,
Enter on line 1 the total gross proceeds • Inventory or property held primarily for enter on line 8, column (h), the smaller of
from: sale to customers; line 7, column (h), or line 8, column (g).
• Sales or exchanges of real estate • Copyrights, literary, musical, or artistic
reported to you for 2003 on Form(s) compositions, letters or memoranda, or Line 9, Column (g)
1099-S (or substitute statement) that you similar property (a) created by your For recordkeeping purposes, if line 9,
are including on line 2, 10, or 20 and personal efforts, (b) prepared or produced column (g), is zero, the amount on line 7,
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column (g), is the amount of net section from the date the stock was issued until Line 17
1231 loss recaptured in 2003. If line 9, the time of the loss). If you have a recapture of section 179
column (g), is more than zero, you have 2. If the stock was issued before expense deduction reported on Schedule
recaptured all of your net section 1231 November 7, 1978, it was issued under a K-1 (Form 1065), line 25, or Schedule K-1
losses from prior years. written plan that met the requirements of (Form 1120S), line 23, from a
Regulations section 1.1244(c)-1(f), and disposition(s) of property by a partnership
Part II when that plan was adopted, the or S corporation with a fiscal year
If a transaction is not reportable in Part I corporation was treated as a small beginning in 2002 and ending in 2003
or Part III and the property is not a capital business corporation under Regulations (and that partnership or S corporation
asset reportable on Schedule D, report section 1.1244(c)-2(c). fiscal year ends with or within your tax
the transaction in Part II. 3. If the stock was issued after year that begins in 2003), report the
If you received ordinary income from a November 6, 1978, the corporation was recapture amount on line 17, adjusted, if
sale or other disposition of your interest in treated as a small business corporation at necessary, as explained below. Also, for
a partnership, see Pub. 541, the time the stock was issued under purposes of the following instructions, if
Partnerships. Regulations section 1.1244(c)-2(b). To be you did not deduct the section 179
treated as a small business corporation, expense in a prior year, reduce your
Line 10 the total amount of money and other section 179 expense deduction carryover
Report other ordinary gains and losses, property received by the corporation for by the amount attributable to the amount
including gains and losses from property its stock as a contribution to capital and reported on Schedule K-1, and treat the
held 1 year or less, on this line. paid-in surplus generally may not exceed amount reported on Schedule K-1 as
Securities or Commodities Held by $1 million. being reduced by the same amount.
a Trader Who Made a 4. The stock was issued for money or
Mark-To-Market Election other property (excluding stock or If the section 179 expense
securities).
Report on line 10 all gains and losses
from sales and dispositions of securities
5. The corporation, for its 5 most !
CAUTION
deduction recapture pertains to
a disposition of property by a
or commodities held in connection with recent tax years ending before the date of partnership or S corporation
your trading business, including gains and the loss, derived more than 50% of its with a 2003 calendar year or a fiscal year
losses from marking to market securities gross receipts from sources other than beginning in 2003, see the Part III
and commodities held at the end of the royalties, rents, dividends, interest, instructions (instead of the following).
tax year (see Traders Who Made a annuities, and gains from sales and
Mark-To-Market Election on page 2). exchanges of stocks or securities. (If the Note: If the recapture of section 179
Attach to your tax return a statement, corporation was in existence for at least 1 expense deduction pertains to property
using the same format as line 10, tax year but fewer than 5 tax years ending for which the business use dropped to
showing the details of each transaction. before the date of the loss, the 50% test 50% or less, see the Part IV instructions
Separately show and identify securities or applies for the tax years ending before (instead of the following).
commodities held and marked to market that date. If the corporation was not in
The section 179 expense deduction
at the end of the year. On line 10, enter existence for at least 1 tax year ending
recapture amount reported on Schedule
“Trader — see attached” in column (a) and before the date of the loss, the 50% test
K-1 (Form 1065), line 25, or Schedule K-1
the totals from the statement in columns applies for the entire period ending before
(Form 1120S), line 23, may pertain to
(d), (f), and (g). Also, see the instructions that date.) The 50% test does not apply if
more than one asset. You are required to
for line 1 on page 3. the corporation’s deductions (other than
figure an adjustment amount for each
the net operating loss and
Small Business Investment asset. To do so, you need the following
dividends-received deductions) exceeded
Company Stock its gross income during the applicable information for each asset from the
period. But this exception to the 50% test partnership or S corporation:
Report on line 10 ordinary losses from the
sale or exchange (including applies only if the corporation was largely • Description of the property,
worthlessness) of stock in a small an operating company within the 5 most • Gross sales price,
business investment company operating recent tax years ending before the date of • Cost or other basis plus expense of
under the Small Business Investment Act the loss (or, if less, the entire period the sale (not including the partnership’s or S
of 1958. See section 1242. corporation was in existence). corporation’s basis reduction in the
Also attach a statement that includes 6. If the stock was issued before July property due to the section 179 expense
the name and address of the small 19, 1984, it must have been common deduction),
business investment company and, if stock. • Depreciation allowed or allowable (not
applicable, the reason the stock is The maximum amount that may be including the section 179 expense
worthless and the approximate date it treated as an ordinary loss is $50,000 deduction), and
became worthless. ($100,000 if married filing jointly). Special • Amount of section 179 expense
Section 1244 (Small Business) rules may limit the amount of your deduction passed through in previous tax
ordinary loss if (a) you received section years for the property and the
Stock
1244 stock in exchange for property with partnership’s or S corporation’s tax
Individuals report ordinary losses from the year(s) for which the amount was passed
a basis in excess of its FMV or (b) your
sale or exchange (including through.
worthlessness) of section 1244 (small stock basis increased because of
contributions to capital or otherwise. See If you do not have all of the above
business) stock on line 10.
Pub. 550 for more details. Report on information, contact the partnership or S
To qualify as section 1244 stock, all Schedule D losses in excess of the corporation.
six of the following requirements must be maximum amount that may be treated as
met. an ordinary loss (and all gains) from the Recomputed gain or loss. Using the
1. You acquired the stock after June sale or exchange of section 1244 stock. information listed above (provided by the
30, 1958, upon original issuance of the partnership or S corporation), recompute
shares from a domestic corporation (or Keep adequate records to distinguish the gain or loss the partnership or S
the stock was acquired by a partnership section 1244 stock from any other stock corporation reported to you for each asset
in which you were a partner continuously owned in the same corporation. using the worksheet on page 5.
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Worksheet for Recomputation of Gain the disposition of the property, including Line 22
or Loss dispositions of property for which the Partnerships and S corporations, see the
section 179 expense deduction was instructions below under Partnerships or
1. Gross sales price . . . . . . . . . separately reported to you on Schedule S corporations. Partners and
2. Cost or other basis plus K-1 by a partnership or S corporation (see shareholders reporting a disposition of
expense of sale (not including the instructions for line 22). If you have section 179 property separately reported
the partnership’s or S more than four properties to report, use to you on Schedule K-1 (Form 1065 or
corporation’s basis reduction additional forms. For more details on 1120S), see Partners and S corporation
in the property due to the depreciation recapture, see Pub. 544. shareholders on page 6. All others,
section 179 expense Note: If the property was sold on the complete the following steps to figure the
deduction) . . . . . . . . . . . . . . installment sale basis, see the amount to enter on line 22.
3. Depreciation allowed or Instructions for Form 6252 before Step 1. Add the following amounts.
allowable (not including the completing Part III. Also, if you have both
installment sales and noninstallment
• Deductions allowed or allowable for
section 179 expense depreciation (including the 30% or 50%
deduction) . . . . . . . . . . . . . . sales, you may want to use separate
special depreciation allowance),
4. Subtract the amount on line 3 Forms 4797, Part III, for the installment
amortization, depletion, or preproductive
from the amount on line 2 . . . sales and the noninstallment sales.
expenses.
5. Subtract the amount on line 4 Partnerships, S corporations, • The section 179 expense deduction.
• The commercial revitalization
from the amount on line 1 . . .
! and their partners and
shareholders should see the deduction.
• The downward basis adjustment under
CAUTION
Adjustment amounts. For each asset, if line 22 instructions before
the amount on line 5 of the worksheet is a completing Part III. section 50(c) (or the corresponding
loss, treat that amount as a positive provision of prior law).
amount and compare it to the amount of Line 20 • The deduction for qualified clean-fuel
section 179 expense deduction passed The gross sales price includes money, vehicle property or refueling property.
through in previous tax years for the the FMV of other property received, and • Deductions claimed under section 190,
property (provided by the partnership or S any existing mortgage or other debt the 193, or 1253(d)(2) or (3) (as in effect
corporation). Enter the smaller of the two buyer assumes or takes the property before the enactment of P.L. 103-66).
amounts on line 2 of Form 4797 as a subject to. For casualty or theft gains, • The basis reduction for the qualified
positive amount. Also, reduce the section include insurance or other reimbursement electric vehicle credit.
179 expense recapture amount reported you received or expect to receive for each
Step 2. From the Step 1 total, subtract
to you on Schedule K-1 by the same item. Include on this line your insurance
the following amounts.
coverage, whether or not you are
amount before entering it on line 17.
submitting a claim for reimbursement. • Any investment credit recapture
If the amount on line 5 of the amount if the basis of the property was
worksheet is a gain, no adjustment is For section 1255 property disposed of reduced in the tax year the property was
needed to the section 179 expense in a sale, exchange, or involuntary placed in service under section 50(c)(1)
deduction recapture amount reported on conversion, enter the amount realized. (or the corresponding provision of prior
Schedule K-1 (Form 1065), line 25, or For section 1255 property disposed of in law). See section 50(c)(2) (or the
Schedule K-1 (Form 1120S), line 23. any other way, enter the FMV. corresponding provision of prior law).
Enter that amount (without reduction) on • Any section 179 or 280F(b)(2)
line 17 of Form 4797. Also, do not enter Line 21 recapture amount included in gross
an adjustment amount on line 2 of Form Reduce the cost or other basis of the income in a prior tax year because the
4797. property by the amount of any business use of the property decreased to
diesel-powered highway vehicle credit, 50% or less.
Line 18b(1) enhanced oil recovery credit, or disabled • Any qualified clean-fuel vehicle
You must complete this line if there is a access credit. property or refueling property deduction
gain on Form 4797, line 3, column (g); a you were required to recapture because
loss on Form 4797, line 11; and a loss on However, do not reduce the cost or the property ceased to be eligible for the
Form 4684, line 35, column (b)(ii). Enter other basis on this line by any of the deduction.
on this line the smaller of the loss on following amounts. • Any basis increase for qualified electric
Form 4797, line 11, or the loss on Form • Deductions allowed or allowable for vehicle credit recapture.
4684, line 35, column (b)(ii). To figure depreciation (including the 30% or 50% You may have to include depreciation
which loss is smaller, treat both losses as special depreciation allowance), allowed or allowable on another asset
positive numbers. Enter the part of the amortization, depletion, or preproductive (and refigure the basis amount for line 21)
loss from income-producing property on expenses. if you use its adjusted basis in
Schedule A (Form 1040), line 27, and the • The section 179 expense deduction. determining the adjusted basis of the
part of the loss from property used as an • The commercial revitalization property described on line 19. An
employee on Schedule A (Form 1040), deduction. example is property acquired by a
line 22. • The downward basis adjustment under trade-in. See Regulations section
section 50(c) (or the corresponding 1.1245-2(a)(4).
Part III provision of prior law).
• The deduction for qualified clean-fuel Partnerships. Partnerships (other than
Generally, for property held 1 year or vehicle property or refueling property. electing large partnerships) that sell,
less, do not complete Part III; instead use • Deductions claimed under section 190, exchange, or otherwise dispose of
Part II. For exceptions, see the chart on 193, or 1253(d)(2) or (3) (as in effect property for which a section 179 expense
page 1. before the enactment of P.L. 103-66). deduction was previously passed through
Use Part III to figure recapture of • The basis reduction for the qualified to the partners should not complete Form
depreciation and certain other items that electric vehicle credit. 4797 with respect to dispositions that are
must be reported as ordinary income on Instead, include these amounts on line required to be separately stated (see the
the disposition of property. Fill out lines 22. They will be used to determine the instructions for Schedule K (Form 1065)
19 through 24 to determine the gain on property’s adjusted basis on line 23. for details).
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In all other cases, the partnership • Add the result to the depreciation See the following sections for special
should enter the deductions allowed or allowed or allowable with respect to that rules.
allowable for depreciation, amortization, property and enter the result on line 22 of • Section 1245(a)(4) for player contracts
or depletion on line 22 (see steps 1 and 2 Form 4797. and section 1056(c) for information
on page 5). Partners adjust the basis of Complete the remainder of Part III as required from the transferor of a franchise
their interest in the partnership to take indicated on Form 4797 and instructions. of any sports enterprise if the sale or
into account the basis adjustments made You must also make a corresponding exchange involves the transfer of player
at the partnership level. adjustment to your section 179 expense contracts.
S corporations. S corporations that sell, deduction carryover on Form 4562. • Section 1245(a)(5) (repealed) for
exchange, or otherwise dispose of property placed in service before 1987, if
Note: In some cases, the above only a portion of a building is section 1245
property for which a section 179 expense adjustment may change a gain into a
deduction was previously passed through recovery property.
to the shareholders should not complete
loss. If this is the case, report the loss in • Section 1245(a)(6) (repealed) for
Part I instead of Part III. qualified leased property placed in service
Form 4797 with respect to dispositions
that are required to be separately stated Line 23 before 1987.
(see the instructions for Schedule K For section 1255 property, enter the Line 26
(Form 1120S) for details). adjusted basis of the section 126 property Section 1250 property is depreciable real
In all other cases, the S corporation disposed of. property (other than section 1245
should enter the deductions allowed or property). Section 1250 recapture applies
allowable for depreciation, amortization, Line 25 if you used an accelerated depreciation
or depletion on line 22 (see steps 1 and 2 Section 1245 property is property that is method or you claimed the 30% or 50%
on page 5). S corporations must make the depreciable (or amortizable under section special depreciation allowance, or the
basis adjustment required under section 185 (repealed), 197, or 1253(d)(2) or (3) commercial revitalization deduction.
50(c) (or the corresponding provision of (as in effect before the enactment of P.L. Section 1250 recapture does not apply to
prior law). Shareholders adjust the basis 103-66)) and is one of the following. dispositions of the following property
in their stock in the corporation to take • Personal property. placed in service after 1986 (or after July
into account the basis adjustments made • Elevators and escalators placed in 31, 1986, if elected).
at the S corporation level under section service before 1987. • 27.5-year (or 40-year, if elected)
50(c) (or the corresponding provision of • Real property (other than property residential rental property (except for 27.5
prior law). described under tangible real property year qualified New York Liberty Zone
Partners and S corporation below) subject to amortization or property acquired after September 10,
shareholders. If you are a partner or an deductions under section 169, 179, 179A, 2001).
S corporation shareholder and the 185 (repealed), 188 (repealed), 190, 193, • 22-, 31.5-, or 39-year (or 40-year, if
partnership or S corporation has given or 194. elected) nonresidential real property
you a Schedule K-1 that separately • Tangible real property (except buildings (except for 39-year qualified New York
reports information on the sale, and their structural components) if it is Liberty Zone property acquired after
exchange, or other disposition of property used in any of the following ways. September 10, 2001, and property for
for which the section 179 expense 1. As an integral part of which you elected to claim a commercial
deduction was claimed, use the following manufacturing, production, or extraction revitalization deduction).
instructions to report the disposition of the or of furnishing transportation, Real property depreciable under
property on your Form 4797. This communications, or certain public utility ACRS (pre-1987 rules) is subject to
information will be separately reported to services. recapture under section 1245, except for
you on line 25 of the Schedule K-1 (Form 2. As a research facility in these the following, which are treated as section
1065) or on line 23 of the Schedule K-1 activities. 1250 property.
(Form 1120S). Use this information to 3. For the bulk storage of fungible • 15-, 18-, or 19-year real property and
complete lines 19 through 22 of Form commodities (including commodities in a low-income housing that is residential
4797. For line 22, use the following liquid or gaseous state) used in these rental property.
instruction to determine the amount to activities. • 15-, 18-, or 19-year real property and
enter on that line. • A single purpose agricultural or low-income housing that is used mostly
Line 22. The partnership or S horticultural structure (as defined in outside the United States.
corporation will separately state the section 168(i)(13)). • 15-, 18-, or 19-year real property and
following amounts: • A storage facility (not including a low-income housing for which a straight
• Depreciation allowed or allowable with building or its structural components) line election was made.
respect to the property. (This does not used in connection with the distribution of • Low-income rental housing described
include the section 179 expense petroleum or any primary petroleum in clause (i), (ii), (iii), or (iv) of section
deduction.) product. 1250(a)(1)(B). See the instructions for line
• Section 179 expense deduction • Any railroad grading or tunnel bore (as 26b.
previously reported to you with respect to defined in section 168(e)(4)). See section 1250(d) for exceptions
the property. See section 1245(b) for exceptions and limits involving the following.
You should generally add these two and limits involving the following. • Gifts.
amounts and enter the result on line 22 of • Gifts. • Transfers at death.
Form 4797. However, if you were unable • Transfers at death. • Certain tax-free transactions.
to claim all of the section 179 expense • Certain tax-free transactions. • Certain like-kind exchanges,
deduction previously reported to you with • Certain like-kind exchanges, involuntary conversions, etc.
respect to the property, you should do the involuntary conversions, etc. • Exchanges to comply with SEC orders.
following. • Exchanges to comply with SEC orders. • Property distributed by a partnership to
• Subtract your carryover of disallowed • Property distributed by a partnership to a partner.
section 179 expense deduction with a partner. • Disposition of qualified low-income
respect to that property (from Form 4562) • Transfers to tax-exempt organizations housing.
from the section 179 expense deduction where the property will be used in an • Transfers of property to tax-exempt
previously reported to you with respect to unrelated business. organizations if the property will be used
that property. • Timber property. in an unrelated business.
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• Dispositions of property as a result of Gain from disposition of certain 100% minus 10% for each year, or part of
foreclosure proceedings. farmland is subject to ordinary income a year, that the property was held over 10
Special rules apply in the following rules under section 1252 before the years after receipt of the excluded
cases. application of section 1231 (Part I). payments. Use zero if 20 years or more.
• For additional depreciation attributable Enter 100% of line 27a on line 27b
to rehabilitation expenditures, see section Line 29b
except as follows.
If any part of the gain shown on line 24 is
1250(b)(4). • 80% if the farmland was disposed of
• If substantial improvements have been within the 6th year after it was acquired.
treated as ordinary income under sections
1231 through 1254 (for example, section
made, see section 1250(f). • 60% if disposed of within the 7th year. 1252), enter the smaller of (a) line 24
Line 26a • 40% if disposed of within the 8th year. reduced by the part of the gain treated as
Enter the additional depreciation for the
• 20% if disposed of within the 9th year. ordinary income under the other provision
period after 1975. Additional Line 28 or (b) line 29a.
depreciation is the excess of actual If you had a gain on the disposition of oil,
depreciation (including any 30% or 50% gas, or geothermal property placed in Part IV
special depreciation allowance, or service before 1987, treat all or part of the
commercial revitalization deduction) over gain as ordinary income. Include on line Column (a)
depreciation figured using the straight line 22 of Form 4797 any depletion allowed If you took a section 179 expense
method. For this purpose, do not reduce (or allowable) in determining the adjusted deduction for property placed in service
the basis under section 50(c)(1) (or the basis of the property. after 1986 (other than listed property, as
corresponding provision of prior law) to defined in section 280F(d)(4)) and the
figure straight line depreciation. Also, if If you had a gain on the disposition of
business use of the property decreased to
you claimed a commercial revitalization oil, gas, geothermal, or other mineral
50% or less this year, complete column
deduction, figure straight-line depreciation properties (section 1254 property) placed
(a) of lines 33 through 35 to figure the
using the property’s applicable recovery in service after 1986, you must recapture
recapture amount.
period under section 168. all expenses that were deducted as
intangible drilling costs, depletion, mine Column (b)
Line 26b exploration costs, and development costs If you have listed property that you placed
Generally, use 100% as the percentage under sections 263, 616, and 617. in service in a prior year and the business
for this line. However, for low-income Exception. Property placed in service use decreased to 50% or less this year,
rental housing described in clause (i), (ii), after 1986 and acquired under a written figure the amount to be recaptured under
(iii), or (iv) of section 1250(a)(1)(B), see contract entered into before September section 280F(b)(2). Complete column (b),
that section for the percentage to use. 26, 1985, and binding at all times lines 33 through 35. See Pub. 463,
Line 26d thereafter is treated as placed in service Travel, Entertainment, Gift, and Car
before 1987. Expenses, for more details on recapture
Enter the additional depreciation after of excess depreciation.
1969 and before 1976. If straight line Note: A corporation that is an integrated
depreciation exceeds the actual oil company completes line 28a by Note: If you have more than one property
depreciation for the period after 1975, treating amounts amortized under section subject to the recapture rules, figure the
reduce line 26d by the excess. Do not 291(b)(2) as deductions under section recapture amounts separately for each
enter less than zero on line 26d. 263(c). property. Show these calculations on a
separate statement and attach it to your
Line 26f Line 28a tax return.
The amount the corporation treats as If the property was placed in service
before 1987, enter the total expenses Line 33
ordinary income under section 291 is 20%
of the excess, if any, of the amount that after 1975 that: In column (a), enter the section 179
would be treated as ordinary income if • Were deducted by the taxpayer or any expense deduction you claimed when the
such property were section 1245 other person as intangible drilling and property was placed in service. In column
property, over the amount treated as development costs under section 263(c) (b), enter the depreciation allowable on
ordinary income under section 1250. If (except previously expensed mining costs the property in prior tax years (plus any
the corporation used the straight line that were included in income upon section 179 expense deduction you
method of depreciation, the ordinary reaching the producing state) and claimed when the property was placed in
income under section 291 is 20% of the • Would have been reflected in the service).
amount figured under section 1245. adjusted basis of the property if they had
not been deducted. Line 34
Line 27 If the property was placed in service In column (a), enter the depreciation that
Partnerships (other than electing large after 1986, enter the total expenses that: would have been allowable on the section
partnerships) skip this section. Partners • Were deducted under section 263, 616, 179 property from the year the property
must enter on the applicable lines of Part or 617 by the taxpayer or any other was placed in service through (and
III amounts subject to section 1252 person; and including) the current year. See Pub. 946,
according to instructions from the • But for such deduction, would have How To Depreciate Property.
partnership. been included in the basis of the property, In column (b), enter the depreciation
plus that would have been allowable if the
You may have ordinary income on the • The deduction under section 611 that property had not been used more than
disposition of certain farmland held more reduced the adjusted basis of such 50% in a qualified business. Figure the
than 1 year but less than 10 years. property. depreciation from the year it was placed
Refer to section 1252 to determine if If you disposed of a portion of section in service up to (but not including) the
there is ordinary income on the 1254 property or an undivided interest in current year. See Pub. 463 and Pub. 946.
disposition of certain farmland for which it, see section 1254(a)(2).
deductions were allowed under sections Line 35
175 (soil and water conservation) and 182 Line 29a Subtract line 34 from line 33 and enter the
(land clearing) (repealed). Skip line 27 if Use 100% if the property is disposed of recapture amount as “other income” on
you dispose of such farmland during the less than 10 years after receipt of the same form or schedule on which you
10th or later year after you acquired it. payments excluded from income. Use took the deduction. For example, if you
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took the deduction on Schedule C (Form The time needed to complete and file
1040), report the recapture amount as Paperwork Reduction Act Notice. We this form will vary depending on individual
other income on Schedule C (Form ask for the information on this form to circumstances. The estimated average
1040). carry out the Internal Revenue laws of the time is:
Note: If you filed Schedule C or F (Form United States. You are required to give us
1040) and the property was used in both the information. We need it to ensure that Recordkeeping . . . . . . . 36 hr., 49 min.
your trade or business and for the you are complying with these laws and to Learning about the law or
production of income, the portion of the allow us to figure and collect the right the form . . . . . . . . . . . . 8 hr., 15 min.
amount of tax. Preparing, copying,
recapture amount attributable to your
assembling, and sending
trade or business is subject to You are not required to provide the the form to the IRS . . . . . 9 hr., 12 min.
self-employment tax. Allocate the amount information requested on a form that is
on line 35 to the appropriate schedules. subject to the Paperwork Reduction Act If you have comments concerning the
Be sure to increase your basis in the unless the form displays a valid OMB accuracy of these time estimates or
property by the recapture amount. control number. Books or records relating suggestions for making this form simpler,
to a form or its instructions must be we would be happy to hear from you. See
retained as long as their contents may the instructions for the tax return with
become material in the administration of which this form is filed.
any Internal Revenue law. Generally, tax
returns and return information are
confidential, as required by section 6103.
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