If anything, you could report two sales in the Sale of Business Property section, and then the 4797 would be right. Report one sale for the sale of the structure only. Then report another sale for the sale of the land only. That would put the 4797 in line with our interpretation of pub 527.When working it through for the sale of the structure you'd select YES on the screen that asks if you're reporting the sale of a depreciated asset. Then when working it through for the sale of the land you would select NO. I've included a screen shot as an attachment below, of the screen where you would select YES for reporting the sale of the structure, and NO for reporting the sale of the land.
I've never heard of anyone having issues with not separating out the land sale from the structure sale. When it comes to rental property, it all works out in the wash in the end. the "bottom line" is all the IRS cares about being correct. How you got to that bottom line, they could probably care less.
Generally though, if the property was not held out for rent while it was also up for sale, then expenses incurred after that last renter moved out can't be claimed as rental expenses. But that doesn't mean that at least some of those expenses can't be claimed as something else, such as sales expenses.
Overall though, since you point it out, I agree that the program should have the ability to separate out the land sale from the structure sale. After all, the program does specifically ask in the Sale of Business Property section, if you are selling real estate.
