Sales, trades, exchanges

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. Individuals typically use Schedule D (Form 1040), Capital Gains and Losses together with Form 4797 or Form 8949.

For further information, refer to:

• Publication 544, Sales and Other Dispositions of Assets,
• Publication 550, Investment Income and Expenses,
• Instructions for Form 4797, Sales of Business Property, and
• Instructions for Schedule D, Capital Gains and Losses.

Rental property is income-producing property and, if you're 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 4 of Schedule 1 and attach it to Form 1040, U.S. Individual Income Tax Return or Form 1040-SR, U.S. Tax Return for Seniors. If your rental activity doesn't 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 7 of Form 1040 or 1040-SR. See the Instructions for Form 8949 PDF, the Instructions for Form 4797 PDF and the Instructions for Schedule D (Form 1040) PDF.

• Publication 544, Sales and Other Dispositions of Assets

Yes. What you've heard about is a transaction commonly known as a nontaxable exchange or like-kind exchange. A like-kind exchange, when properly executed, can postpone the recognition of gain (and resulting current tax) 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. If the replacement property is of a lesser value than the value of the property you transfer, you may also receive non-like property such as cash, equal to the difference in values, when you receive your replacement property. If so, you must recognize the gain on the transfer of your rental property, but only to the extent of the non-like-kind property you receive.

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 Income Tax 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 IRS.

The basis of the property you acquire in a like-kind exchange is generally the same as the basis of the property 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. Also, if you recognize gain on the exchange because you received cash or other non-like-kind property in the exchange, your basis in the property acquired is the basis of the property given up, reduced by the amount of cash and fair market value of any property received, and increased by gain you recognized.

• Publication 544, Sales and Other Dispositions of Assets
• Form 8824, Like-Kind Exchanges (and section 1043 conflict-of-interest sales)

Under section 121 of the Internal Revenue Code, 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, you may not exclude gain from the sale or exchange of your main home if it's allocable to periods of nonqualified use; refer to Publication 523, Selling Your Home.

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 (actually deducted) or allowable (legally expected to be deducted) as a deduction for periods after May 6, 1997. If you can show by adequate records or other evidence that the depreciation deduction allowed was less than the amount of depreciation allowable, you may limit the recognized gain attributable to depreciation to the amount of the depreciation allowed. A simplified method of computing the deduction for the business use of a home that sets depreciation to zero may apply. Refer to Simplified option for home office deduction for details.

Reporting the sale of your home

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 (but not loss) to the extent of the amount of money or the value of other property you received. 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.

• Instructions for Form 4797, Sales of Business Property