IRS Form 4797 and Schedule D have confused several taxpayers. Both are different, so it is crucial to understand both clearly. 

Schedule D versus Form 4797

When people sell a property and the time comes to file their tax returns, they wonder if it should get mentioned in Form 4797 or Schedule D. Both are tax forms that are associated with reporting gains but there is a difference. Basically, Schedule D is designed for reporting personal gains, whereas Form 4797 is to document gains from property sale that was used for business purpose or generate income. 

If the same real estate property was used for personal and business purposes then allocate realized gains between both forms. To determine if you have capital gains or ordinary gains is tricky, so you can sign for an online taxation course. Basic & Beyond, Inc. hosts income tax seminars including IRS Form 4797 Instructions and other relevant topics. Tax preparers can stay updated about the new changes in the tax laws and regulations.

Example to understand the difference between Schedule D & Form 4797

John owned a duplex and used one unit for a personal residence, while the other unit was rented to a tenant. He sold the duplex and earned a $40,000 profit. As the building had two units, the amount can be split. John can report $20,000 gains on Schedule D and claim exclusion for selling a personal residence unit. The other unit’s $20,000 gain must be reported in Form 4797 as rental property sale.

The same approach can be taken, if you own a storefront with a livable apartment above it. IRS Form 4797 reports profits earned from selling property used for agricultural, industrial, or extractive services. If your business is subjected to unintentional recapture or conversion, then use this form. 

Remember, if you work from home that is the primary residence and are selling it then there is no need to fill Form 4797. On the other hand, a profit from the primary residence sale is eligible for tax exclusion on capital gains [Schedule D]. Form 4797 is strictly to report gains from real state used for business purposes.