The rental property should have been reported on Schedule E.
Generally, landlords filing 1040 or 1040-SR returns will report their rental income and expenses on IRS Schedule E: Supplemental Income and Loss.
However, if you provide "substantial services" to your tenants or your real estate business generates rental income, use Schedule C: Profit or Loss from Business.
Substantial services go above and beyond the basic services typically provided to renters (utilities, maintenance, landscaping, trash collection, etc.). If you’re providing hotel-like perks such as regular cleaning or maid service (in excess of 10% of the rental cost), fresh linens or towels, in-room coffee, transportation, or sight-seeing, you’re providing substantial services, and that means you'd file Schedule C.
Yes, you would use Form 4797 to report the sale of the rental property. The depreciation for the house for 2021 would be for the time that you owned the property in 2021.
From the numbers that you entered, there does not seem to be a capital gain on the actual sale of the house. But there is depreciation recapture that is taxed.
Rental property depreciation recapture is the gain that the real estate investor receives from selling the investment property, and it must be reported as income to the IRS. This can hurt an investor because it’s additional income that you have to pay taxes on based on your ordinary tax rate, which can be in addition to capital gains tax. Depreciation of rental property should be reported on IRS Form 4797.
When you take depreciation, you’re adjusting the property’s cost basis downward. So, when you sell the property, you have to pay taxes on it because you previously offset some of your ordinary income taxes by claiming depreciation. Depreciation recapture is assessed when the property’s sales price exceeds its adjusted cost basis. An adjusted cost basis just means the net cost of the asset after it’s been adjusted for depreciation.
Keep in mind that capital gains tax on real estate is also due when you sell an investment property for more than you purchased it for. Part of the profit is taxed as a capital gain and may qualify for the 20 percent capital gains tax, and the other part of the profit is taxed at the ordinary tax rate, which is generally higher than the capital gains tax rate.
Part of the profit is taxed at the ordinary tax rate because it was depreciated over time. The IRS uses rental property depreciation recapture as a way to collect taxes on profits from the sale of a rental property. This is because the taxpayer was able to previously write depreciation off against their taxable income during their ownership of the property.
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