Special Rules

At-Risk Rules If you report a loss on an asset used in an activity for which you are not at risk, in whole or in part, see the Instructions for Form 6198. Also, see Pub. 925, Passive Activity and At-Risk Rules. Losses from passive activities are subject first to the at-risk rules and then to the passive activity rules.

Depreciable Property and Other Property Disposed of in the Same Transaction If you disposed of both depreciable property and other property (for example, a building and land) in the same transaction and realized a gain, you must allocate the amount realized between the two types of property based on their respective fair market values (FMVs) to figure the part of the gain to be recaptured as ordinary income because of depreciation. The disposition of each type of property is reported separately in the appropriate part of Form 4797. For example, for property held more than 1 year, report the sale of a building in Part III and the land in Part I.

Disposition of Depreciable Property Not Used in Trade or Business Generally, gain from the sale or exchange of depreciable property not used in a trade or business but held for investment or for use in a not-for-profit activity is capital gain. Generally, the gain is reported on Form 8949 and Schedule D. However, part of the gain on the sale or exchange of the depreciable property may have to be recaptured as ordinary income on Form 4797. Use Part III of Form 4797 to figure the amount of ordinary income recapture. The recapture amount is included on line 31 (and line 13) of Form 4797. See the instructions for Part III. If the total gain for the depreciable property is more than the recapture amount, the excess is reported on Form 8949. On Form 8949, enter “From Form 4797” in column (a) of Part I (if the transaction is short term) or Part II (if the transaction is long term), and skip columns (b) and (c). In column (d), enter the excess of the total gain over the recapture amount. Leave columns (e) through (g) blank and complete column (h). If you invested this gain into a QOF and intend to elect the temporary deferral of the gain, see the Instructions for Form 8949; Form 8997, Initial and Annual Statement of Qualified Opportunity Fund (QOF) Investments, and its instructions; and the instructions for the applicable Schedule D.

Generally, loss from the sale or exchange of depreciable property not used in a trade or business but held for investment or for use in a not-for-profit activity is a capital loss. Report the loss on Form 8949 in Part I (if the transaction is short term) or Part II (if the transaction is long term). You can deduct capital losses up to the amount of your capital gains. For taxpayers other than corporations, also deduct the lower of $3,000 ($1,500 if you are a married individual filing a separate return), or the excess of such losses over such gains. See the Instructions for Form 8949 and the Instructions for Schedule D (Form 1040).

Partial Dispositions of MACRS Property You may elect to recognize a partial disposition of a Modified Accelerated Cost Recovery System (MACRS) asset, and report the gain, loss, or other deduction on a timely filed, including extensions, federal tax return for the year of the disposition. In some cases, however, you are required to report the gain or loss on the partial disposition of a MACRS asset (see Required partial dispositions , later). MACRS assets include buildings (and their structural components) and other tangible depreciable

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property placed in service after 1986 that is used in a trade or business or for the production of income.

For more information on partial dispositions of MACRS property, see Regulations section 1.168(i)-8(d).

Elective partial dispositions. If you elect to recognize a partial disposition of a MACRS asset, report the gain or loss (if any) on Form 4797, Part I, II, or III, as applicable, and include the words “Partial Disposition Election” in the description of the partially disposed asset. See the instructions for Parts I, II, and III. For more information on the disposition of MACRS assets, see Regulations section 1.168(i)-8.

Traders Who Made a Mark-to-Market Election A trader in securities or commodities may elect under section 475(f) to use the mark-to-market method to account for securities or commodities held in connection with a trading business. Under this method of accounting, any security or commodity held at the end of the tax year is treated as sold at its FMV on the last business day of that year.

Unless you are a new taxpayer, the election must be made by the due date (not including extensions) of the tax return for the year prior to the year for which the election becomes effective.

Required partial dispositions. Report the gain or loss (if any) on the following partial dispositions of MACRS assets on Form 4797, Part I, II, or III, as applicable.

If you are a trader in securities or commodities with a mark-to-market election under section 475(f) in effect for the tax year, the following special rules apply.

• Sale of a portion of a MACRS asset.

• Involuntary conversion of a portion of a MACRS asset other than from a casualty or theft.

• Gains and losses from all securities or commodities held in connection with your trading business (including those marked to market) are treated as ordinary income and losses, instead of capital gains and losses. As a result, the lower capital gain tax rates and the limitation on capital losses don’t apply.

• Like-kind exchange of a portion of a MACRS asset (Form 4797, line 5 or 16).

See the instructions for lines 1b and 1c and the instructions for Parts I, II, and III. Also, see Other Forms You May Have To File , earlier.

Disposition of Assets That Constitute a Trade or Business If you sell a group of assets that make up a trade or business and the buyer's basis in the assets are determined wholly by the amount paid for the assets, both you and the buyer must generally allocate the total sales price to the assets transferred. File Form 8594, Asset Acquisition Statement, to report the sale. See the Instructions for Form 8594. Also, see Pub. 544 for more details on the sale of business assets.

Installment Sales If you sold property at a gain and you will receive a payment in a tax year after the year of sale, you must generally report the sale on the installment method unless you elect not to do so.

Use Form 6252 to report the sale on the installment method. Also use Form 6252 to report any payment received during your 2025 tax year from a sale made in an earlier year that you reported on the installment method. Enter any gain from the installment sale on Form 4797, line 4 or line 15, as applicable. See the instructions for Form 6252.

To elect out of the installment method, report the full amount of the gain on a timely filed return (including extensions). If you timely filed your tax return without making the election, you can still make the election by filing an amended return within 6 months of the due date of your return (excluding extensions). Enter “Filed pursuant to section 301.9100-2” at the top of the amended return.

For a detailed discussion of installment sales, see Pub. 537.

• The gain or loss from each security or commodity held in connection with your trading business (including those marked to market) is reported on Form 4797, Part II, line 10. See Securities or Commodities Held by a Trader Who Made a Mark-to-Market Election in the instructions

for line 10.

For details on the mark-to-market election for traders and how to make the election, see section 475(f). Also see Pub. 550.

Sale of Home Used for Business If you sold property that was your home and you also used it for business, you may need to use Form 4797 to report the sale of the part used for business (or the sale of the entire property if used entirely for business). Gain or loss on the sale of the home may be a capital gain or loss or an ordinary gain or loss. Any gain on the personal part of the property is a capital gain. You cannot deduct a loss on the personal part. Any gain or loss on the part of the home used for business is an ordinary gain or loss, as applicable, reportable on Form 4797. Any gain or loss on the part producing income for which the underlying activity does not rise to the level of a trade or business is a capital gain or loss, as applicable. See Disposition of Depreciable Property Not Used in Trade or Business , earlier. For more details, see Pub. 544. Also, see Pub. 523, Selling Your Home.

Exclusion of gain on sale of home used for business. You may be able to exclude part or all of the gain figured on Form 4797 if the property sold was used for business and was also owned and used as your principal residence during the 5-year period ending on the date of the sale. During that 5-year period, you must have owned and used the property as your personal residence for 2 or more years. However, the exclusion may not apply to the part of the gain that is allocated to any period after December 31,

• The wash sale rule does not apply to securities or commodities held in connection with your trading business.

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2008, during which the property was not used as your principal residence.

If the property was held more than 1 year after you converted it to business use, complete Part III to figure the amount of the gain. Do not take the exclusion into account when figuring the gain on line 24. If line 22 includes depreciation for periods after May 6, 1997, you cannot exclude gain to the extent of that depreciation. On Part I, line 2, enter “Section 121 exclusion,” and enter the amount of the exclusion as a (loss) in column (g).

If the property was held for 1 year or less after you converted it to business use, report the sale and the amount of the exclusion, if any, in a similar manner on Part II, line 10.

For details and exceptions, including how to figure gain on the sale of a home used for business and the amount of the exclusion, see section 121 and Pub. 523.

Involuntary Conversion of Property You may not have to pay tax on a gain from an involuntary or compulsory conversion of property. See Pub. 544 for details.

Passive Loss Limitations If you have an overall loss from passive activities and you report a loss on an asset used in a passive activity, use Form 8582, Passive Activity Loss Limitations, or Form 8810, Corporate Passive Activity Loss and Credit Limitations, as applicable, to see how much loss is allowed before entering it on Form 4797.

You cannot claim unused passive activity credits when you dispose of your interest in an activity. However, if you dispose of your entire interest in an activity, you may elect to increase the basis of the credit property by the original basis reduction of the property to the extent that the credit has not been allowed because of the passive activity rules. Make the election on Form 8582-CR, Passive Activity Credit Limitations, or Form 8810, as applicable. No basis adjustment may be elected on a partial disposition of your interest in an activity.

Recapture of Preproductive Expenses If you elect under section 263A(d)(3) not to use the uniform capitalization rules of section 263A, any plant that you produce is treated as section 1245 property. For dispositions of plants reportable on Form 4797, enter the recapture amount taxed as ordinary income on Part III, line 22. See Disposition of plants in chapter 9 of Pub. 225, Farmer's Tax Guide, for details.

Section 197(f)(9)(B)(ii) Election If you made the election under section 197(f)(9)(B)(ii) to recognize gain on the disposition of a section 197 intangible and to pay a tax on that gain at the highest tax rate, include the additional tax on Form 1040, line 16 (or the appropriate line of other income tax returns). Check box 3 and enter “197” and the tax in the space next to that box. The additional tax is the amount that, when added to any other income tax on the gain, equals the gain multiplied by the highest tax rate.

Deferral of Gain Invested in a Qualified Opportunity Fund (QOF) If you realized a gain from an actual or deemed sale or exchange with an unrelated person and, during the 180-day period beginning on the date the gain is realized, you invested any portion of the gain in a QOF, then you may elect to temporarily defer such eligible capital gain that would otherwise be includible in the current tax year’s income. If you make the election, the eligible capital gain is included in taxable income only to the extent, if any, the amount of realized gain exceeds the aggregate amount invested in a QOF during the 180-day period.

A taxpayer may elect to temporarily defer a qualified section 1231 gain (gains derived from the sale of property used in a trade or business, including gains from installment sales and like-kind exchanges) by investing the amount of the eligible gain into a QOF. Qualified section 1231 gains are eligible to be invested into a QOF to the extent the section 1231 gain exceeds any amount that is treated as ordinary income due to depreciation recapture as required by sections 1245 and 1250. Sections 1245 and 1250 gain may not be deferred into a QOF. For more information, see section 1400Z-2 and the related regulations.

How to report. Report the gain including any depreciation recapture required by sections 1245 and 1250 as it would otherwise be reported if you were not making the election. Then, on Form 4797, line 2, report the qualified section 1231 gains you are electing to defer as a result of an investment into a QOF within 180 days of the date sold. If you are reporting the sale directly on Form 4797, line 2, use the line directly below the line on which you reported the sale. In column (a), identify the section 1231 gains invested into a QOF as “QOF investment to Form 8949”; columns (b), (c), (d), (e), and (f) will remain blank. Report the amount of section 1231 gains invested into a QOF as a negative amount (in parentheses) in column (g).

For example, if a taxpayer realizes $300,000 of section 1231 gains in a tax year but chooses to defer $75,000 of section 1231 gains by investing those gains into a QOF within 180 days of the date of sale, the taxpayer would enter “QOF investment to Form 8949” in column (a) and enter ($75,000) in column (g).

Similarly, if the taxpayer disposed of an investment in a QOF during the tax year triggering recognition of section 1231 deferred gains, the taxpayer should report the gain on a separate row in line 2, enter “QOF inclusion from section 1231 gains” in column (a), and report the $75,000 of previously deferred and currently recognizable section 1231 gains as a positive number in column (g). Make the election for the deferred amount invested in a QOF on Form 8949. See the Instructions for Form 8949. If you held a qualified investment in a QOF at any time during the year, you must file your return with Form 8997 attached. See the instructions for Form 8997. For more information about QOFs, see IRS.gov/Ozfaqs .

Exclusion of Gain From Sale of DC Zone Assets If you sold or exchanged a District of Columbia Enterprise Zone (DC Zone) asset that you acquired after 1997 and

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before 2012, and held for more than 5 years, you may be able to exclude the amount of “qualified capital gain.” This exclusion applies to an interest in, or property of, certain businesses operating in the District of Columbia. See section 1400B (as in effect before its repeal) for more details and special rules. Also see Pub. 544.

How to report. If applicable, report the entire gain realized from the sale or exchange as you otherwise would without regard to the exclusion. To report the exclusion, enter “DC Zone Asset Exclusion” on Form 4797, line 2, column (a), and enter as a (loss) in column (g) the amount of the exclusion that offsets the gain reported on Part I, line 6.

Any unrecaptured section 1250 gain is not