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Video instructions and help with filling out and completing Can Form 4797 Businesses

Instructions and Help about Can Form 4797 Businesses

In this video, I'm going to discuss the treatment of the sale of a rental property for tax purposes. I will also point out some IRS resources that can be referred to for additional information. Generally, a rental property is one that you've owned for more than a year and rent to tenants. When you file your tax returns at the end of the year, you file a Schedule E to recognize the income and expenses related to the property. This is considered a trade or business. Owning a rental property is also considered a passive investment. For the sale of a rental property, it is specifically defined as not a capital asset. As a result, it is considered a section 1231 asset and you must follow section 1231 rules. However, a portion of the gain may end up being treated as capital gain. There are additional rules starting with section 1231 property on Form 4797. This is where the gain or loss is calculated when dealing with the sale of a rental property. The sale price is fairly straightforward, but there are specific rules for what can be included in this calculation. The cost basis is not simply what you paid for the property. It would include what you paid, any other related fees or costs, and any improvements or remodels that were not deducted as expenses on Schedule E. These increase the basis. A critical piece in the sale of a rental property is the depreciation expense that you took. You have to add up all the depreciation expense that has been taken on the property and then decrease your cost basis by that amount. This can sometimes result in a gain when you thought you had a loss. If you have a gain, section 1231 recaptures the depreciation expense you've taken....