Reporting the Sale of a Rental Home
The sale of an asset used for business purposes, such as a home that is rented for income, is reported on IRS Form 4797-Sale of Business Property. If there was any rental activity in the year the property was sold, the rental income and expenses are reported on Schedule E, Supplemental Income and Loss, just as it was in prior years. Only include rental income and expenses up until the date of sale on Schedule E.
Instructions
1. Enter the sale proceeds on line 1 of Form 4797. The proceeds will be reported to you on form 1099-S. Form 1099-S will be mailed to you by January 31 of the year following the sale.
2. Skip Parts I and II of Form 4797 since they do not apply to the sale of rental real estate.
3. Record a description of the rental property on line A of Part III, line 19(a) of Form 4797. The description should include the address of the rental home. Enter the date acquired and date sold on lines 19(b) and 19(c), respectively. If you are unsure of the dates to report, review your closing documents from both the original purchase and the sale. The date sold will also be included on form 1099-S.
4. Enter the gross sale price of the rental home on line 20 under the column for Property A. If you are only reporting one sale on Form 4797, the amount on line 20 will match the amount on line 1.
5. Calculate the cost basis of the property, add expenses related to the sale of the property and enter the total on line 21. The cost basis is the amount you purchased the property for. Selling expenses allowed to be added to the cost basis include attorney fees, title fees and recording fees.
6. Add depreciation deducted throughout your ownership of the rental property and any Section 179 expense deduction taken, and enter the total on line 22. Section 179 expenses are expenses deducted in full in the year incurred instead of depreciating them over the useful life. Expenses relating to a rental home that may be written off, using Section 179, include major roof repairs and the cost of re-siding the entire home.
7. Subtract line 22 from line 21 and record the amount on line 2. This is your adjusted basis in the rental home.
8. Subtract line 23, the adjusted basis, from line 20, the gross sale price, to calculate your gain on the rental home.
9. Calculate and record the depreciation for the rental home in lines 26(a) through 26(g). Rental homes are by definition Section 1250 property. Section 1250 property refers to depreciable real property. There is no depreciation recapture if you used straight line depreciation during your ownership of the rental home. Calculate the amount of depreciation deducted for the rental home from the year 1975 through the sale date. Calculate the amount of depreciation that would have been recorded if the straight line method of depreciation was used. Determine the difference between the two methods and enter the result on line 26(a).
10. Calculate 100 percent of the smaller of line 24 or 26(a) and enter the result on line 26(b). A percent less than 100 percent is only used for certain low-income housing. If you are the owner of a rental property classified as low-income housing, refer to the guidelines in Section 1250 for the applicable percentage to use.
11. Subtract line 26(a) from line 24. Since you are completing Form 4797 for the sale of a rental home, skip lines 26(d), 26(e) and 26(f). Enter the result from line 26(b) on line 26(g). If you are reporting the sale of more than one rental home, repeat the process for the other properties.
12. Skip lines 25, 27, 28 and 29. These sections do not apply to rental homes.
13. Determine the total gain on all rental properties reported on Form 4797, line 24 and enter the result on line 30. Add line 26(g) for all sales reported on Form 4797 and record on line 31. Subtract line 31 from line 30 and enter the result on line 32 and line 6 (Part I) of Form 4797.
14. Complete other sections of Form 4797, if applicable, to report sales of other business property.
15. Add lines 2 through 6 on Part I of Form 4797 and enter the result on line 7. You will also enter the result on Schedule D, line 11, long-term capital gains. Do not record anything in lines 8, 9, 11 or 12 on Form 4797 since these do not apply to rental homes. The gain from the sale of the rental home will be included with the other gains reported on Schedule D and be reported on line 13 of Form 1040.
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