2003 HTML Instructions for Form 4797,

This is archived information that pertains only to the 2003 Tax Year. If you
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Table of Contents

Changes To Note

The Jobs and Growth Tax Relief Reconciliation Act of 2003 reduced the capital gains tax rates for noncorporate taxpayers for sales, exchanges, or conversions of assets (including installment payments received) after May 5, 2003. Because the change in the capital gains rates may affect the tax treatment of section 1231 gains and losses, noncorporate taxpayers (and S corporations) with a net section 1231 gain may need to use column (h) in Part I to report post-May 5, 2003, gains and losses (see the footnote on Form 4797, Part I).
Partnerships (other than electing large partnerships), S corporations, and their partners and shareholders must follow revised instructions for reporting the disposition of property for which a section 179 expense deduction was claimed in a prior year (see the line 22 instructions on page 5).
Partners and shareholders must follow revised instructions for reporting section 179 expense deduction recapture reported by a partnership or S corporation with a fiscal year beginning in 2002 (see the line 17 instructions on page 4).

Purpose of Form

Use Form 4797 to report:

Where to Make First Entry

The sale or exchange of:
1. Property used in your trade or business;
2. Depreciable and amortizable property;
3. Oil, gas, geothermal, or other mineral properties; and
4. Section 126 property.
The involuntary conversion (from other than casualty or theft) of property used in your trade or business and capital assets held in connection with a trade or business or a transaction entered into for profit.
The disposition of noncapital assets (other than inventory or property held primarily for sale to customers in the ordinary course of your trade or business).
The disposition of capital assets not reported on Schedule D.
The gain or loss (including any related recapture) for partners and S corporation shareholders from certain section 179 property dispositions by partnerships (other than electing large partnerships) and S corporations.
The computation of recapture amounts under sections 179 and 280F(b)(2) when the business use of section 179 or listed property decreases to 50% or less.

Other Forms To Use

Use Form 4684, Casualties and Thefts, to report involuntary conversions from casualties and thefts.
Use Form 8824, Like-Kind Exchanges, to report exchanges of qualifying business or investment property for property of a like kind. For exchanges of property used in a trade or business (and other noncapital assets), enter the gain or (loss) from Form 8824, if any, on line 5 or 16.
If you sold property on which you claimed investment credit, see Form 4255, Recapture of Investment Credit, to find out if you must recapture some or all of the credit.

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, At-Risk Limitations. 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 land in Part I).

Disposition of Assets That Constitute a Trade or Business

If you sell a group of assets that makes up a trade or business, both you and the buyer generally must allocate the total sales price to the assets transferred and file Form 8594, Asset Acquisition Statement.

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 generally must report the sale on the installment method unless you elect not to do so.

Use Form 6252, Installment Sale Income, to report the sale on the installment method. Also use Form 6252 to report any payment received during your 2003 tax year from a sale made in an earlier year that you reported on the installment method.

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). Write “Filed pursuant to section 301.9100-2” at the top of the amended return.

See Pub. 537, Installment Sales, for more details.

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 (and reacquired) 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.

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.

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 do not apply.
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, line 10 (see the instructions for line 10 on page 4).
The wash sale rule does not apply to securities or commodities held in connection with your trading business.

For details on the mark-to-market election and how to make it, see Pub. 550, Investment Income and Expenses; sections 475(e) and 475(f); and Rev. Proc. 99-17, 1999-1 C.B. 503. You can find Rev. Proc. 99-17 on page 52 of Internal Revenue Bulletin 1999-7 at www.irs.gov/pub/irs-irbs/irb99-07.pdf.

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, Sales and Other Dispositions of Assets, for details.

Exclusion of Gain on Sale of a Home Used for Business

If the property sold was used for business or to produce rental income and also was owned and used as your home during the 5-year period ending on the date of the sale, you may be able to exclude part or all of the gain figured on Form 4797. For details on the exclusion (including how to figure the amount of the exclusion), see Pub. 523, Selling Your Home.

If the property was held more than 1 year, 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 line 2 of Form 4797, write “Section 121 exclusion,” and enter the amount of the exclusion as a (loss) in column (g) and, if applicable, as a (loss) in column (h).

If the property was held for 1 year or less, report the sale and the amount of the exclusion, if any, in a similar manner on line 10 of Form 4797.

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, 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. No basis adjustment may be elected on a partial disposition of your interest in an activity.

Recapture of Preproductive Expenses

If you elected out of 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 line 22 of Form 4797. See Pub. 225, Farmer's Tax Guide, for details.

Section 197(f)(9)(B)(ii) Election

If you elected 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 41 (or the appropriate line of other income tax returns). On the dotted line next to that line, enter “197” and the amount. 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.

Rollover of Gain From Empowerment Zone Assets

If you sold a qualified empowerment zone asset that you held for more than 1 year, you may be able to elect to postpone part or all of the gain that you would otherwise include on Form 4797, Part I. If you make the election, the gain on the sale generally is recognized only to the extent, if any, that the amount realized on the sale exceeds the cost of qualified empowerment zone assets (replacement property) you purchased during the 60-day period beginning on the date of the sale. The following rules apply.

No portion of the cost of the replacement property may be taken into account to the extent the cost is taken into account to exclude gain on a different empowerment zone asset.
The replacement property must qualify as an empowerment zone asset with respect to the same empowerment zone as the asset sold.
You must reduce the basis of the replacement property by the amount of postponed gain.
This election does not apply to any gain (a) treated as ordinary income or (b) attributable to real property, or an intangible asset, which is not an integral part of an enterprise zone business.
The District of Columbia enterprise zone is not treated as an empowerment zone for this purpose.
The election is irrevocable without IRS consent.

See Pub. 954 for the definition of empowerment zone and enterprise zone business. You can find out if your business is located within an empowerment zone by using the
RC/EZ/EC Address Locator at http://hud.esri.com/locateservices/ezec.

Qualified empowerment zone assets are:

Tangible property, if:
1. You acquired the property after December 21, 2000,
2. The original use of the property in the empowerment zone began with you, and
3. Substantially all of the use of the property, during substantially all of the time that you held it, was in your enterprise zone business; and
Stock in a domestic corporation or a capital or profits interest in a domestic partnership, if:
1. You acquired the stock or partnership interest after December 21, 2000, solely in exchange for cash, from the corporation at its original issue (directly or through an underwriter) or from the partnership;
2. The business was an enterprise zone business (or a new business being organized as an enterprise zone business) as of the time you acquired the stock or partnership interest; and
3. The business qualified as an enterprise zone business during substantially all of the time during which you held the stock or partnership interest.

How to report. Report the entire gain realized from the sale as you otherwise would without regard to the election. On Form 4797, line 2, enter “Section 1397B Rollover” in column (a) and enter as a (loss) in column (g) and, if applicable, as a (loss) in column (h), the amount of gain included on Form 4797 that you are electing to postpone. 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.

See section 1397B for more details.

General Instructions