Form 4797: sales of business property and recapture
Form 4797 is the IRS form taxpayers use to report sales and exchanges of business property, involuntary conversions and depreciation recapture. Part III turns depreciation into ordinary income, Part I nets section 1231 gains and losses, and Part II collects ordinary gains and losses.
“Use Part III to figure recapture of depreciation and other items that must be reported as ordinary income on the disposition of certain property.” IRS, Instructions for Form 4797 (2025)
What does Form 4797 report?
Form 4797 reports sales, exchanges and involuntary conversions of property used in a trade or business, along with the depreciation recapture those sales trigger. According to the Instructions for Form 4797 (2025), it covers real and depreciable property used in a business, involuntary conversions other than casualty or theft, dispositions of noncapital assets, and capital assets not reported on Schedule D.
Form 4797 also handles three items that are not ordinary sales:
- Gain or loss, including recapture, for partners and S corporation shareholders on section 179 property the entity disposed of
- Recapture under sections 179 and 280F(b)(2) when business use of section 179 or listed property drops to 50% or less, in Part IV
- Ordinary gains and losses of securities traders with a section 475(f) mark-to-market election
Line 1a reports gross proceeds from Forms 1099-S (and certain Forms 1099-B) that are included on lines 2, 10 or 20, so the IRS can match the information returns. Lines 1b and 1c report gains and losses from partial dispositions of MACRS assets. Casualties and thefts start on Form 4684, installment sales on Form 6252 and like-kind exchanges on Form 8824, and each of those forms feeds a specific Form 4797 line.
Which part of Form 4797 does each sale go in?
Each sale goes in Form 4797 Part I, II or III based on the type of property, the holding period and whether the result is a gain or a loss. The Instructions for Form 4797 (2025) set this out in the chart Where To Make First Entry for Certain Items Reported on This Form, summarized below.
| Property sold | Held 1 year or less | Held more than 1 year |
|---|---|---|
| Depreciable tangible business property (section 1245), gain | Part II, 10 | Part III, 19 to 25b |
| Depreciable tangible business property, loss | Part II, 10 | Part I, 2 |
| Depreciable real business property (section 1250), gain | Part II, 10 | Part III, 19 to 26g |
| Depreciable real business property, loss | Part II, 10 | Part I, 2 |
| Land used in the business | Part II, 10 | Part I, 2 |
| Property deducted under the de minimis safe harbor | Part II, 10 | Part II, 10 |
| K-1 net section 1231 gain (loss): 1065 box 10, 1120-S box 9 | Part I | |
| Section 179 or listed property, business use 50% or less | Part IV, 33 to 35 | Part IV, 33 to 35 |
The documents behind each entry are the closing statement or Form 1099-S for the gross sales price (line 2, column (d), or line 20), and the fixed asset register for cost and depreciation allowed or allowable (column (f) and (e), or lines 21 and 22). Depreciable property held for investment rather than used in a business is the exception: recapture is figured in Part III and the excess gain goes on Form 8949 marked From Form 4797.
How do section 1245 and 1250 recapture work on Form 4797?
Depreciation recapture on Form 4797 turns part of a gain into ordinary income in Part III before the rest reaches Part I. For section 1245 property, line 25b is the smaller of the total gain on line 24 or the depreciation on line 25a. Line 22 depreciation includes section 179 and any special allowance, so expensed assets recapture in full up to the gain.
For section 1250 property, the line 26 instructions exempt post-1986 MACRS residential rental and nonresidential real property from recapture unless a special allowance was claimed. Line 26g is then zero, and the straight-line depreciation becomes unrecaptured section 1250 gain on the Schedule D line 19 worksheet. Corporations add section 291 recapture on line 26f.
Line 31 totals the recapture and goes to line 13 as ordinary income. Line 32, the rest of the gain, goes to line 6 in Part I, where line 8 treats net section 1231 gain as ordinary up to nonrecaptured section 1231 losses of the 5 preceding years.
What does a Form 4797 calculation look like?
For example, Dana, a sole proprietor, sells four business assets in 2025 and has no section 1231 losses in the prior 5 years. A machine bought in 2021 for $40,000, with $30,000 of depreciation, sells for $22,000. A nonresidential building placed in service in 2015 for $300,000, with $80,000 of straight-line MACRS depreciation, sells for $350,000, and its land (cost $50,000) sells for $70,000. A tool bought in March 2025 for $10,000 sells in October for $7,000.
| Step | Form 4797 line | Amount |
|---|---|---|
| Form 1099-S proceeds, building and land | 1a | $420,000 |
| Machine gain ($22,000 minus $10,000 adjusted basis) | 24 A | $12,000 |
| Section 1245 recapture, smaller of $12,000 or $30,000 | 25b A | $12,000 |
| Building gain ($350,000 minus $220,000) | 24 B | $130,000 |
| Section 1250 recapture, straight-line MACRS | 26g B | $0 |
| Total recapture | 31 to 13 | $12,000 |
| Remaining Part III gain | 32 to 6 | $130,000 |
| Land gain | 2 | $20,000 |
| Net section 1231 gain to Schedule D, line 11 | 7 | $150,000 |
| Tool held 7 months, loss | 10 | ($3,000) |
| Ordinary gain to Schedule 1, line 4 | 17 and 18b | $9,000 |
Dana has $9,000 of ordinary income and $150,000 of long-term gain. The Unrecaptured Section 1250 Gain Worksheet takes the smaller of line 22 ($80,000) or line 24 ($130,000) for the building, less line 26g, so $80,000 of the $150,000 is unrecaptured section 1250 gain.
What do reviewers check on Form 4797?
A reviewer checking Form 4797 confirms six items, each tied to the 2025 Instructions for Form 4797 or Schedule D. The fixed asset register and the closing statements are the first documents to pull, since cost, depreciation and sales price for every line come from them.
Two related pages cover the inputs: Form 4562 for the depreciation that sets line 22, and section 179 recapture for Part IV, which applies when business use drops but the asset is not sold. Part IV recapture from an earlier year reduces line 22 when the asset is later sold. For pass-through sellers, the partnership or S corporation reports section 1231 results on Schedule K, and the owner's worksheet in the instructions handles section 179 property the entity sold.
Every line checked against the documents the client sent
Filed reads the closing statements, Forms 1099-S, fixed asset register and K-1s, then checks every line of Form 4797 against them. Anything that doesn't tie comes back as a review item with a citation to the source.
Book a demoLine 2 shows an $18,500 gain on a packaging machine held 3 years, but the fixed asset register shows $41,000 of depreciation, including $25,000 of section 179. Confirm the sale should move to Part III so line 25b recaptures the $18,500 as ordinary income.
Common questions
Does the sale of a rental building go on Form 4797 or Form 8949?
The sale of a rental building used in a trade or business goes on Form 4797, under the Instructions for Form 4797 (2025). For depreciable property held for investment instead, the instructions put the recapture in Part III and send any excess gain to Form 8949, entered as From Form 4797, with long-term or short-term treatment by holding period.
What is the section 1231 lookback on Form 4797?
The section 1231 lookback on Form 4797 treats this year's net section 1231 gain as ordinary income up to the net section 1231 losses deducted in the 5 preceding tax years that have not been recaptured. Line 8 holds those losses, and line 12 receives the recaptured ordinary portion, according to the 2025 instructions.
Where does a partner report section 1231 gain from a K-1?
A partner reports net section 1231 gain or loss from Schedule K-1 (Form 1065), box 10, in Part I of Form 4797, and an S corporation shareholder does the same with K-1 (Form 1120-S), box 9. The instructions for line 7 then apply the lookback and send any gain to Schedule D.