If you dispose of business
property, you may have a gain or
loss that you report on Form
1040. However, in some cases you
may have a gain that is not
taxable or a loss that is not
deductible. This chapter
discusses whether you have a
disposition, how to figure the
gain or loss, and where to
report the gain or loss.
Useful Items - You
may want to see:
Publication
544
Sales and Other
Dispositions of Assets
Form
(and Instructions)
4797
Sales of Business
Property
Sch D (Form 1040)
Capital Gains and Losses
See chapter 12 for information
about getting publications and
forms.
What Is a
Disposition of
Property?
A disposition of property
includes the following
transactions.
You sell property
for cash or other
property.
You exchange
property for other
property.
You receive money as
a tenant for the
cancellation of a lease.
You receive money
for granting the
exclusive use of a
copyright throughout its
life in a particular
medium.
You transfer
property to satisfy a
debt.
You abandon
property.
Your bank or other
financial institution
forecloses on your
mortgage or repossesses
your property.
Your property is
damaged, destroyed, or
stolen, and you receive
property or money in
payment.
Your property is
condemned, or disposed
of under the threat of
condemnation, and you
receive property or
money in payment.
For details about damaged,
destroyed, or stolen property,
see Publication 547, Casualties,
Disasters, and Thefts. For
details about other
dispositions, see chapter 1 in
Publication 544.
Nontaxable
exchanges.
Certain exchanges of
property are not taxable.
This means any gain from the
exchange is not recognized
and you cannot deduct any
loss. Your gain or loss will
not be recognized until you
sell or otherwise dispose of
the property you receive.
Like-kind exchanges.
A like-kind exchange is
the exchange of property for
the same kind of property.
It is the most common type
of nontaxable exchange. To
be a like-kind exchange, the
property traded and the
property received must be
both of the following.
Business or
investment property.
Like property.
Report the exchange of
like-kind property on
Form
8824, Like-Kind
Exchanges. For more
information about like-kind
exchanges, see chapter 1 in
Publication 544.
Installment
sales.
An installment sale is a
sale of property where you
receive at least one payment
after the tax year of the
sale. If you finance the
buyer's purchase of your
property, instead of having
the buyer get a loan or
mortgage from a third party,
you probably have an
installment sale.
For more information about
installment sales, see
Publication 537, Installment
Sales.
Sale of a
business.
The sale of a business
usually is not a sale of one
asset. Instead, all the
assets of the business are
sold. Generally, when this
occurs, each asset is
treated as being sold
separately for determining
the treatment of gain or
loss.
Both the buyer and seller
involved in the sale of a
business must report to the
IRS the allocation of the
sales price among the
business assets. Use
Form
8594, Asset
Acquisition Statement Under
Section 1060, to provide
this information. The buyer
and seller should each
attach Form 8594 to their
federal income tax return
for the year in which the
sale occurred.
For more information about
the sale of a business, see
chapter 2 of Publication
544.
How Do I Figure a
Gain or Loss?
Table
3-1. How To Figure a Gain or
Loss
IF your...
THEN you have
a...
Adjusted basis is
more than the amount
realized
Loss.
Amount realized is
more than the
adjusted basis
Gain.
Basis, adjusted basis, amount
realized, fair market value, and
amount recognized are defined
next. You need to know these
definitions to figure your gain
or loss.
Basis.
The cost or purchase price
of property is usually its
basis for figuring the gain
or loss from its sale or
other disposition. However,
if you acquired the property
by gift, inheritance, or in
some way other than buying
it, you must use a basis
other than its cost. For
more information about
basis, see Publication 551,
Basis of Assets.
Adjusted
basis.
The adjusted basis of
property is your original
cost or other basis plus
certain additions, and minus
certain deductions such as
depreciation and casualty
losses. In determining gain
or loss, the costs of
transferring property to a
new owner, such as selling
expenses, are added to the
adjusted basis of the
property.
Amount
realized. The amount
you realize from a
disposition is the total of
all money you receive plus
the fair market value of all
property or services you
receive. The amount you
realize also includes any of
your liabilities that were
assumed by the buyer and any
liabilities to which the
property you transferred is
subject, such as real estate
taxes or a mortgage.
Fair market
value.
Fair market value is the
price at which the property
would change hands between a
buyer and a seller, neither
having to buy or sell, and
both having reasonable
knowledge of all necessary
facts.
Amount
recognized. Your gain
or loss realized from a
disposition of property is
usually a recognized gain or
loss for tax purposes.
Recognized gains must be
included in gross income.
Recognized losses are
deductible from gross
income. However, a gain or
loss realized from certain
exchanges of property is not
recognized. See
Nontaxable exchanges, earlier. Also, you
cannot deduct a loss from
the disposition of property
held for personal use.
Is My Gain
or Loss Ordinary
or Capital?
You must classify your
gains and losses as either
ordinary or capital gains or
losses. You must do this to
figure your net capital gain
or loss. Generally, you will
have a capital gain or loss
if you dispose of a capital
asset. For the most part,
everything you own and use
for personal purposes or
investment is a capital
asset.
Certain property you use
in your business is not a
capital asset. A gain or
loss from a disposition of
this property is an ordinary
gain or loss. However, if
you held the property longer
than 1 year, you may be able
to treat the gain or loss as
a capital gain or loss.
These gains and losses are
called section 1231 gains
and losses.
For more information
about ordinary and capital
gains and losses, see
chapters 2 and 3 in
Publication 544.
Is My
Capital Gain or
Loss Short Term
or Long Term?
If you have a capital
gain or loss, you must
determine whether it is long
term or short term. Whether
a gain or loss is long or
short term depends on how
long you own the property
before you dispose of it.
The time you own property
before disposing of it is
called the holding period.
IF you hold
the property...
THEN you have
a...
1 year or less
Short-term
capital gain or
loss.
More than 1 year
Long-term
capital gain or
loss.
For more information
about short-term and
long-term capital gains and
losses, see chapter 4 of
Publication 544.
Where Do I Report
Gains and Losses?
Report gains and losses from
the following dispositions on
the forms indicated. The
instructions for the forms
explain how to fill them out.
Dispositions of business
property and depreciable
property. Use
Form
4797. If you have
taxable gain, you may also
have to use Schedule D (Form
1040).
Like-kind
exchanges.
Use
Form 8824,
Like-Kind Exchanges. You may
also have to use Form 4797
and Schedule D (Form 1040).
Installment
sales.
Use
Form 6252,
Installment Sale Income. You
may also have to use Form
4797 and Schedule D (Form
1040).
Casualties
and thefts. Use
Form
4684, Casualties
and Thefts. You may also
have to use Form 4797.
Condemned
property.
Use
Form 4797. You
may also have to use
Schedule D (Form 1040).
