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Frequently Asked Tax Questions

Sale or Trade of Business, Depreciation, Rentals - Sales, Trades, Exchanges

  1. What form(s) do we need to fill out to report the sale of rental property?
  2. What forms do we file to report a loss on the sale of a rental property?
  3. I have heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?
  4. Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?
  5. We sold a rental property last year and used the Tax Deferred Exchange rules under section 1031 to defer the gain into another like-kind property. How do I report this transaction on my tax return?
  6. I sold a rental property in which I had previous years' loss carryover due to the loss limitation rules. Can I recover the total carryover since the property has been disposed of?

Rev. date: 08/04/2012

What form(s) do we need to fill out to report the sale of rental property?

The gain or loss on the sale of rental property is reported on Form 4797 (PDF), Sale of Business Property. Form 1040, Schedule D (PDF), Capital Gains and Losses, is often used in conjunction with Form 4797.
For further information, refer to Publication 544, Sales on Other Disposition of Assets, Publication 550, Investment Income and Expense, the Instructions to Form 4797 (PDF), Sale of Business Property, and the Instructions for Schedule D (and Form 8949) (PDF).

Rev. date: 08/04/2012

What forms do we file to report a loss on the sale of a rental property?

The loss on the sale of rental property is reported on Form 4797 (PDF), (Sale of Business Property), as an ordinary loss.

Rev. date: 08/04/2012

I have heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?

What you have heard about is certain types of like-kind exchanges.  A like-kind exchange, when properly executed,
The basis of the property received is the basis of the property given up, increased by the money paid.
There are several rules and restrictions that must be strictly adhered to in order for a successful exchange to take place.  For a sale of property and the acquisition of other like-kind property with the proceeds, you must comply with one of the safe harbors set forth in the Income tax regulations or certain other publications of the Internal Revenue Service.

Rev. date: 08/04/2012

Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?

You may be able to exclude gain from the sale of your main home that you have also used for business or to produce rental income if you meet the ownership and use tests and the gain is not allocable to non-qualified use, as detailed in Publication 523, Selling Your Home.
However, if you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you must recognize the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. (Note: If you can show by adequate records or other evidence that the depreciation deduction allowed (did deduct) was less than the amount allowable (could have deducted), you may limit the recognized gain attributable to depreciation to the amount of the depreciation allowed.)
The gain, exclusion, and depreciation recapture should be reported on Form 1040, Schedule D, Capital Gains and Losses, as described in Publication 523, Selling Your Home.

Rev. date: 10/03/2012

We sold a rental property last year and used the Tax Deferred Exchange rules under section 1031 to defer the gain into another like-kind property. How do I report this transaction on my tax return?

Report the exchange of like-kind property on Form 8824, Like-Kind Exchanges. The instructions for the form explain how to report the details of the exchange. Report the exchange even though no gain or loss is recognized.
If you have any taxable gain resulting from the transaction because you received money or property not solely like-kind, report it on Form 4797, Sale of Business Property, and Form 1040, Schedule D, Capital Gains and Losses. Refer to Chapter 1, Gain or Loss, in Publication 544, Sales and Other Dispositions of Assets, which has a detailed section on qualifying like-kind exchanges.

Rev. date: 08/04/2012

I sold a rental property in which I had previous years' loss carryover due to the loss limitation rules. Can I recover the total carryover since the property has been disposed of?

The losses (but not credits) that have not been allowed from your rental property in previous years including the current year generally are allowed in full in the tax year you dispose of the entire interest in the property.
More than one form or schedule may be required for reporting the loss.  See Publication 925, Passive Activity and At-Risk Rules and Publication 544, Sales and Other Disposition of Assets for information on the reporting of the sale of activities with unallowed losses.