What Is Form 4797, Sales of Business Property?

Form 4797 is the IRS form you file to report gains and losses from selling, exchanging, or involuntarily losing property used in a trade or business. It handles transactions that don’t belong on Schedule D and aren’t part of the inventory you sell to customers: a piece of equipment, a rental building, a company vehicle, or business property destroyed in a disaster. The form sorts each transaction into a category that determines whether your gain is taxed at lower capital gains rates or higher ordinary income rates, and that sorting can meaningfully change what you owe.

What Property Belongs on Form 4797

Form 4797 covers property used in a trade or business, not personal-use items and not inventory. Under Section 1231, qualifying property generally includes depreciable assets held for more than one year: machinery, vehicles, equipment, buildings, and furniture used in business operations.¹ Real property used in a business qualifies even when it isn’t depreciable, as long as you held it more than a year.

The definition reaches further than physical assets. Timber, coal, domestic iron ore, and certain livestock — cattle and horses held for draft, breeding, dairy, or sporting purposes for at least 24 months — all count as Section 1231 property.¹ Amortizable intangibles like goodwill, customer lists, and other Section 197 intangibles also get reported here when sold as part of a business.

Involuntary conversions belong on the form too. If business property is destroyed by disaster, stolen, or taken by a government through eminent domain, you report the event on Form 4797 even though there was no voluntary sale, and even if you received insurance proceeds or a condemnation award.²

Some property does not go on Form 4797. Inventory held for sale to customers, personal-use assets such as your own car or home, and capital assets already reported on Schedule D stay off the form.

The Four Parts of the Form

Form 4797 is split into four parts, and each handles a different kind of transaction. Where your sale lands controls how it’s taxed.

Part I: Section 1231 Gains and Losses

Part I is for sales and exchanges of property held more than one year that qualifies under Section 1231. If your total Section 1231 gains for the year exceed your Section 1231 losses, the net gain is treated as a long-term capital gain and taxed at the lower capital gains rate. If losses exceed gains, the net loss is an ordinary loss, deductible against regular income without the limits that apply to capital losses.¹ That dual treatment is one of the more favorable provisions in the tax code: capital gains rates on the upside, ordinary loss treatment on the downside.

Part I also picks up gain from like-kind exchanges reported on Form 8824. If you exchanged business real property under Section 1031 and recognized a partial gain, that gain flows to Part I, line 5.³

Part II: Ordinary Gains and Losses

Part II handles property held one year or less, plus certain noncapital assets. Everything here is taxed as ordinary income or deducted as an ordinary loss. There’s no capital gains rate. Part II also receives the ordinary income portion of depreciation recapture calculated in Part III, which flows up from line 31 to line 13.

Part III: Depreciation Recapture

Part III calculates how much of your gain on depreciable property must be recaptured — taxed as ordinary income rather than capital gain. You previously deducted depreciation against ordinary income; when you sell for more than the depreciated value, the code claws back some of that benefit. The rules split by property type, described below.

Part IV: Section 179 and Listed Property Recapture

Part IV applies in one specific situation: business use of property drops to 50 percent or less after you claimed a Section 179 expense deduction or accelerated depreciation on listed property, such as a vehicle used for both business and personal purposes. You don’t have to sell anything to trigger it. Reducing business use below the threshold is enough. Part IV figures the difference between what you deducted and what straight-line depreciation would have allowed, and that difference becomes ordinary income.⁴

Depreciation Recapture: Section 1245 vs. Section 1250

Recapture is usually the hardest part of the form. The rules depend on whether the property falls under Section 1245 (generally personal property such as equipment and machinery) or Section 1250 (generally real property such as buildings).

Section 1245 Property

For Section 1245 property, all of the depreciation you previously deducted is subject to recapture. Your gain is treated as ordinary income up to the total depreciation allowed or allowable, whichever is less than the gain you realized.⁵ Only the portion of gain above total depreciation gets Section 1231 capital gains treatment. Amortizable intangibles like goodwill follow the same 1245 rules: amortization claimed under Section 197 is recaptured as ordinary income when the asset is sold.⁶

Section 1250 Property

Section 1250 recapture is narrower. Only “additional depreciation” — the amount by which your actual deductions exceeded what straight-line depreciation would have produced — is recaptured as ordinary income.⁵ Most real property placed in service after 1986 must use straight-line depreciation under MACRS, so there’s often little or no additional depreciation to recapture.

Straight-line depreciation on real property doesn’t escape entirely, though. The gain attributable to it, called unrecaptured Section 1250 gain, is taxed at a maximum federal rate of 25 percent. That’s higher than the standard long-term capital gains rate but lower than ordinary income rates for most taxpayers.⁷ Any remaining gain above total depreciation is taxed at regular long-term capital gains rates.

The Five-Year Lookback

The favorable capital gains treatment on Section 1231 gains has a catch. Under Section 1231(c), if you claimed net Section 1231 losses as ordinary deductions in any of the five preceding tax years, your current-year net Section 1231 gain is recharacterized as ordinary income up to the amount of those unrecaptured prior losses.¹ The IRS calls these nonrecaptured net Section 1231 losses.

On the form, you handle this on lines 7 and 8 of Part I. Line 7 shows your current-year net Section 1231 gain; line 8 shows your nonrecaptured losses from the prior five years. The lesser of the two moves to line 12 as ordinary income.³

What You Need Before You Start

For each property you’re reporting, pull together:

A brief description of the property, such as the type of equipment or the address of real estate.
The date you originally acquired it.
The date the sale closed or the involuntary conversion occurred.
The gross sales price, including cash, notes, and the fair market value of any property received.
Your cost or other basis: original purchase price plus the cost of improvements.
Total depreciation allowed or allowable over the time you held the property.

Adjusted basis equals cost or other basis minus depreciation allowed. Gross sales price minus adjusted basis gives you the gain or loss. The depreciation number matters most. An error there cascades through the rest of the form: understate depreciation, and you overstate basis, mis-size recapture, and understate tax. Keep the closing statements, purchase agreements, depreciation schedules, and improvement receipts that support every entry. The current form and instructions are on IRS.gov.²

Other Forms That Feed Into Form 4797

Several forms interact with Form 4797 when a transaction is more than a straight sale.

Form 8824 for Like-Kind Exchanges

If you exchanged business or investment real property for similar property under Section 1031, you report the exchange on Form 8824 first. Any recognized gain or loss from a partially taxable exchange then transfers to Form 4797, Part I (line 5) or Part II (line 16), depending on the property type.³

Form 6252 for Installment Sales

If you sell business property and receive payments across multiple years, you report the installment sale on Form 6252. The ordinary income from depreciation recapture is reported in the year of sale regardless of the payment schedule. The remaining installment income flows to Form 4797, Part I (line 4) for trade or business property held more than one year, or Part II (line 10) for property held one year or less.⁸

Form 8594 for a Business Sold as a Whole

When you sell an entire business rather than a single asset, both you and the buyer file Form 8594 to show how the purchase price was allocated across asset classes (equipment, real property, goodwill, and so on). That allocation controls how much gain falls into each part of Form 4797.³

How to File It

Form 4797 is not filed by itself. You attach it to your primary return. Individuals attach it to Form 1040, C corporations to Form 1120, and S corporations and partnerships to Form 1120-S or Form 1065.⁴

Keep your records related to the property until the statute of limitations expires for the year you disposed of it, generally at least three years after you file the return reporting the sale.⁹

What Errors Cost

Mistakes on Form 4797 cost more than the extra tax. If you underreport gain or overstate basis, the IRS can impose an accuracy-related penalty equal to 20 percent of the resulting underpayment. If the error involves a gross valuation misstatement, generally overstating value by 200 percent or more, the penalty doubles to 40 percent.¹⁰

The common failure point is depreciation. Recapture is calculated on depreciation “allowed or allowable,” which means the IRS treats you as having claimed the depreciation whether you actually did or not. Getting that number right before you begin filling in the form is the single most important step in avoiding penalties and interest.

1
Office of the Law Revision Counsel. 26 U.S. Code 1231 – Property Used in the Trade or Business and Involuntary Conversions
2
Internal Revenue Service. About Form 4797, Sales of Business Property
3
Internal Revenue Service. Instructions for Form 4797
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Internal Revenue Service. 2025 Instructions for Form 4797 – Sales of Business Property
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Internal Revenue Service. Publication 544, Sales and Other Dispositions of Assets
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Office of the Law Revision Counsel. 26 USC 1245 – Gain From Dispositions of Certain Depreciable Property
7
Internal Revenue Service. Topic No. 409, Capital Gains and Losses
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Internal Revenue Service. Form 6252 Installment Sale Income
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Internal Revenue Service. How Long Should I Keep Records
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Office of the Law Revision Counsel. 26 U.S. Code 6662 – Imposition of Accuracy-Related Penalty on Underpayments