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Frequently Asked Tax Questions

Sale or Trade of Business, Depreciation, Rentals - Sales, Trades, Exchanges

  1. What form(s) do we need to fill out to report the sale of rental property?
  2. What forms do we file to report a loss on the sale of a rental property?
  3. I've heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?
  4. Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?
  5. Last year we sold a rental property, acquired a replacement property, and want to use the like-kind exchange rules under section 1031 of the Internal Revenue Code to defer the gain of the rental property sold. How do I report this transaction on my tax return?

Rev. date: 09/20/2019

What form(s) do we need to fill out to report the sale of rental property?

Report the gain or loss on the sale of rental property on Form 4797, Sales of Business Property or on Form 8949, Sales and Other Dispositions of Capital Assets depending on the purpose of the rental activity. Transfer any gain or loss reported to Schedule 1 and attach Schedule 1 to Form 1040, U.S. Individual Income Tax Return. Individuals typically use Schedule D (Form 1040), Capital Gains and Losses together with Form 4797 or Form 8949.
For further information, refer to:

Rev. date: 09/20/2019

What forms do we file to report a loss on the sale of a rental property?

Rental property is income-producing property and, if you are in the trade or business of renting real property, report the loss on the sale of rental property on Form 4797, Sales of Business Property. Normally, you transfer the loss as an ordinary loss to line 14 of Schedule 1 and attach it to Form 1040, U.S. Individual Income Tax Return. If your rental activity does not rise to the level of a trade or business, but instead is held for investment or for use in a not-for-profit activity, the loss is a capital loss. Report the loss on Form 8949, Sales and Other Dispositions of Capital Assets in Part I (if the transaction is short term) or Part II (if the transaction is long term). If your capital losses are more than your capital gains, you can deduct the difference as a capital loss deduction even if you don’t have ordinary income to offset it. The yearly limit on the amount of the capital loss you can deduct is $3,000 ($1,500 if you are married and file a separate return). Normally, you transfer the capital loss to line 13 of Schedule 1 and attach it to Form 1040. See the Instructions for Form 8949, the Instructions for Form 4797, and the Instructions for Schedule D (Form 1040).

Rev. date: 09/20/2019

I've heard that I can sell my rental property and use the proceeds to purchase rental property of equal or greater value and the transaction is viewed just like an exchange in that the tax is deferred until the new property is sold. Is this true?

Yes. What you've heard about is a transaction commonly known as a like-kind exchange. A like-kind exchange, when properly executed, can postpone the recognition of gain (and resulting current tax) essentially by shifting the basis of property sold to like-kind replacement property. You do this by acquiring a like-kind property, which may be of lesser or greater value.
The basis of the property that you acquire in a like-kind exchange is generally the same as the basis of the property that you transferred. However, if you transfer money or other property (not like-kind) in addition to like-kind property, your basis in the property acquired is the basis of the property given up, increased by the amount of money or other property transferred.  
To successfully defer gain in a like-kind exchange, you must comply with certain requirements under section 1031 of the Internal Revenue Code and the regulations thereunder. For example, when you sell your rental property, you can't take actual or constructive receipt of the sale proceeds. You can avoid actual or constructive receipt of the proceeds if you comply with one of the safe harbors, such as using a qualified intermediary or a qualified trust to hold and use the sale proceeds to acquire the replacement property, as set forth in the Income Tax Regulations or certain other publications of the Internal Revenue Service.

Rev. date: 09/20/2019

Can we move into our rental property, live there as our main home for two years, and sell it without having to pay capital gains tax?

You may be able to exclude much of the gain from the sale of your main home that you also used for business or to produce rental income, if you meet the ownership and use tests. However, if you were entitled to take depreciation deductions because you used your home for business purposes or as rental property, you may not exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation deduction allowed (actually deducted) was less than the amount allowable (legally expected to be deducted), you may limit the recognized gain attributable to depreciation to the amount of the depreciation allowed. For tax years beginning in 2013 or later, a simplified method of computing the deduction for the business use of a home that sets depreciation to zero may apply. Please refer to Simplified Option for Home Office Deduction for details.
Reporting the Sale of Your Home
IfThen
You meet the ownership and use tests and there's no business or rental use in the year of the saleYou should report the gain, Section 121 exclusion and depreciation-related gain that you can't exclude on Form 8949, Sales and other Dispositions of Capital Assets and Schedule D (Form 1040), Capital Gains and Losses. For more information, refer to Publication 523, Selling Your Home.
You meet the ownership and use tests but there's business or rental use in the year of saleYou should report the sale of the business or rental part on Form 4797, Sales of Business Property. Form 4797 takes into account the business or rental part of the gain, the Section 121 exclusion, and depreciation-related gain that you can't exclude.
The part of your property used for business or rental use is within your home, such as a home office for a businessYou don't need to allocate gain on the sale of the property between the business or rental part of the property and the part used as a home. In addition, you don't need to report the sale of the business or rental part on Form 4797. This is true whether or not you were entitled to claim any depreciation. However, you can't exclude the part of any gain equal to any depreciation allowed or allowable after May 6, 1997.
 

Rev. date: 09/20/2019

Last year we sold a rental property, acquired a replacement property, and want to use the like-kind exchange rules under section 1031 of the Internal Revenue Code to defer the gain of the rental property sold. How do I report this transaction on my tax return?

Report the exchange of like-kind property on Form 8824, Like-Kind Exchanges for the year of the exchange. The Instructions for Form 8824 explain how to report the details of the exchange. Even if you recognize no gain or loss, you must report the exchange.
If you received money or other property (not like-kind) as part of the exchange, you must recognize gain to the extent of the amount of money or the value of other property you received, but you don't recognize a loss. For this purpose, consideration received by a taxpayer in the form of an assumption of a liability by the other party to the exchange or the transfer by the taxpayer of property subject to a liability is treated as money or other property. However, in determining the gain you must recognize, consideration you receive in the form of an assumption of a liability or the transfer of your property subject to a liability may be offset by (1) any cash you pay to the other party to the exchange, and (2) certain liabilities you assume as part of the exchange. You must report recognized gain on Form 4797, Sales of Business Property and Schedule D (Form 1040), Capital Gains and Losses. Refer to the detailed section on qualifying like-kind exchanges in Chapter 1, Gain or Loss, in Publication 544, Sales and Other Dispositions of Assets.