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.

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).

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. Pub. 544, Sales and Other Dispositions of Assets, discusses the sale of business assets in chapter 2 under Other Dispositions.

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 to report the sale on the installment method. Also use Form 6252 to report any payment received during your 2006 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.

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.

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.

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

If the property sold was used for business or to produce rental income and was also 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).

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.

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.

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 Disposition of plants and animals in chapter 9 of Pub. 225, Farmer's Tax Guide, for details.

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 44 (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.

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.

See Pub. 954, Tax Incentives for Distressed Communities, 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 www.hud.gov/crlocator.

Qualified empowerment zone assets are:

If you sold or exchanged a District of Columbia Enterprise Zone (DC Zone) asset that you held for more than 5 years, you may be able to exclude the “qualified capital gain.” The qualified gain is, generally, any gain recognized in a trade or business that you would otherwise include on Form 4797, Part I. This exclusion also applies to an interest in, or property of, certain businesses operating in the District of Columbia.

If you sold or exchanged qualifying electric transmission property after October 22, 2004, you may elect to defer part of the realized gain. The sale or disposition must be made to an independent transmission company. If you make the election, part or all of the realized gain is recognized ratably over the 8-year period that begins with the tax year that includes the date of the disposition. The amount of gain that is not eligible to be recognized over the 8-year period is the excess, if any, of the amount realized from the disposition over the cost of the exempt utility property purchased during the 4-year period beginning on the date of the disposition. See section 451(i) for more details.

To make the election, you must attach a statement to your timely filed return (including extensions) for the tax year in which the qualifying electric transmission transaction occurred (members of an affiliated group of corporations filing a consolidated return, attach the election to the consolidated tax return).

The statement must provide all of the following details regarding the qualifying electric transmission transaction, including:

Once made, the election is irrevocable.