topic Form 4797 in Investors & landlords

Form 4797

momtothreeboys — Sun, 16 Feb 2025 18:56:29 GMT

Hello! I sold a rental home. I section 179 the HVAC unit that I purchased last year. Facts are:

I estimate the "gross sales value" at that date is $8,073 <-- based on its expected life and depreciation up until sales date (which was over one year)

Cost basis $8,650

Depreciated (fully under section 179) $8,650

I believe the full $8,073 should appear on line 25b (and subject to tax at ordinary rates) but for some reason the amount is only appearing on 26c I feel comfortable in the worksheet or step by step. I read through the worksheet and it does recognize that it was section 179 last year - it just is putting that amount in the wrong category resulting in it being taxed at capital gains rather than taxed at ordinary rate. I believe the full "gain" has to be recaptured at ordinary rates. Please let me know. Thanks so much!

Re: Form 4797

DianeW777 — Mon, 17 Feb 2025 17:11:26 GMT

It depends. The section 179 was used on a rental home, and it didn't qualify to be used. Section 179 is allowed only on a 'nonresidential' building.

That being said, you will include the amount of section 179 as well as all depreciation used on the rental home until sold. This will all be recaptured which eliminates ordinary income and does tax your resulting gain as a capital gain. It flows from the Form 4797 to the Schedule D. You are recapturing all depreciation now and it was sold.

By following the step-by-step with confidence, it is flowing property because it's residential rental property. The IRS considers this as Section 1250 property and gain.

IRS Publication 544

IRS Publication 946

Qualified section 179 real property. You can elect to treat certain qualified real property you placed in service during the tax year as section 179 property. If this election is made, the term “section 179 property” will include any qualified real property that is:

Qualified improvement property, as described in section 168(e)(6) of the Internal Revenue Code; and

Any of the following improvements to nonresidential real property placed in service after the date the nonresidential real property was first placed in service.

Roofs.
Heating, ventilation, and air-conditioning property.
Fire protection and alarm systems.
Security systems.

For more information, see Special rules for qualified section 179 real property, later.

Re: Form 4797

momtothreeboys — Mon, 17 Feb 2025 23:25:49 GMT

Thanks Diane! My apologies for not all the info - but I qualify because it is a vacation rental, so I depreciate it as a commercial property as well.

Since HVAC was only in service for 18 months and it has a 7 year life - I have to recapture the difference between this accelerated method and straight line. Based on the forms view - it states this has to be manually adjusted, so I have to override the cell. Is there any way to not manually adjust it?

Re: Form 4797

DianeW777 — Wed, 19 Feb 2025 17:40:09 GMT

Yes, I understand what you need now. You can manually adjust the prior depreciation and recapture the amount of unallowed depreciation. The difference should be entered on the Form 4797, line 6 (actually starts out from line 24, Part III), which should then carry to Part II for Ordinary gains, then transfer to Schedule 1, Part 1, line 4. This will result in an ordinary gain on Form 1040.

TurboTax may want to carry this to a different section since the confusion comes from the type of property (real vs personal).

Tax Terms:

Real Property (anything that is land, buildings and structural components)
Personal Property - Everything else - two types
1. Tangible - anything you can see, feel or touch
2. Intangible - in and of itself it has no value but represents a value (a dollar bill or a stock certificate, etc)