Form 1099-B.   If you sold stocks, bonds, commodities, etc., you should receive Form 1099-B or an equivalent statement. Whether or not you receive Form 1099-B, you must report all taxable sales of stocks, bonds, commodities, etc., on Schedule D. For more information on figuring gains and losses from these transactions, see chapter 4 in Publication 550.

Form 1099-S.   An information return must be provided on certain real estate transactions. Generally, the person responsible for closing the transaction must report on Form 1099-S sales or exchanges of the following types of property. If you sold or exchanged any of the above types of property, the reporting person must give you a copy of Form 1099-S or a statement containing the same information as the Form 1099-S.

  If you receive or will receive property or services in addition to gross proceeds (cash or notes) in this transaction, the person reporting it does not have to value that property or those services. In that case, the gross proceeds reported on Form 1099-S will be less than the sales price of the property you sold. Figure any gain or loss according to the sales price, which is the total amount you realized on the transaction.

Personal-use property.   Report gain on the sale or exchange of property held for personal use (such as your home) on Schedule D. Loss from the sale or exchange of property held for personal use is not deductible. But if you had a loss from the sale or exchange of real estate held for personal use for which you received a Form 1099-S, report the transaction on Schedule D, even though the loss is not deductible. Complete columns (a) through (e) and enter -0- in column (f).

Where you report a capital gain or loss depends on how long you own the asset before you sell or exchange it. The time you own an asset before disposing of it is the holding period.

If you hold a capital asset 1 year or less, the gain or loss from its disposition is short term. Report it in Part I of Schedule D. If you hold a capital asset longer than 1 year, the gain or loss from its disposition is long term. Report it in Part II of Schedule D (Form 1040). 

These distinctions are essential to correctly arrive at your net capital gain or loss. Capital losses are allowed in full against capital gains plus up to $3,000 of ordinary income. See Capital Gains Tax Rates, later.

The totals for short-term capital gains and losses and the totals for long-term capital gains and losses must be figured separately.

If your capital losses are more than your capital gains, you must deduct the difference even if you do not 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).

To figure your capital loss carryover from 2003 to 2004, use the Capital Loss Carryover Worksheet in the 2004 Instructions for Schedule D (Form 1040).

The tax rates that apply to a net capital gain are generally lower than the tax rates that apply to other income. These lower rates are called the maximum capital gains rates.

The term “net capital gain” means the amount by which your net long-term capital gain for the year is more than your net short-term capital loss.

See the Schedule D (Form 1040) Instructions.

Section 1231 gains and losses.   Show any section 1231 gains and losses in Part I. Carry a net gain to Schedule D (Form 1040) as a long-term capital gain. Carry a net loss to Part II of Form 4797 as an ordinary loss.

  If you had any nonrecaptured net section 1231 losses from the preceding 5 tax years, reduce your net gain by those losses and report the amount of the reduction as an ordinary gain in Part II. Report any remaining gain on Schedule D (Form 1040). See Section 1231 Gains and Losses in chapter 3.

Ordinary gains and losses.   Show any ordinary gains and losses in Part II. This includes a net loss or a recapture of losses from prior years figured in Part I of Form 4797. It also includes ordinary gain figured in Part III.

Ordinary income from depreciation.   Figure the ordinary income from depreciation on personal property and additional depreciation on real property (as discussed in chapter 3) in Part III. Carry the ordinary income to Part II of Form 4797 as an ordinary gain. Carry any remaining gain to Part I as section 1231 gain, unless it is from a casualty or theft. Carry any remaining gain from a casualty or theft to Form 4684.

Jane sold the equipment she used in her dress shop for $3,000. She originally paid $6,000 for it on January 20, 1986, and had fully depreciated it. She realized a gain of $3,000. The gain was less than the $6,000 depreciation taken, so all her gain is ordinary income from depreciation. This amount is reported in Part III of Form 4797 and entered in Part II on line 13.

The adjusted basis of the customer parking lot (acquired in 1980) was $6,000 and its sales price was $8,000. Jane reports her $2,000 gain from the sale in Part I of Form 4797.

Jane had a nonrecaptured net section 1231 loss of $1,200. She shows this loss in Part I on line 8. The net section 1231 gain of $2,000 is more than the nonrecaptured loss, so that gain is treated as ordinary gain only up to the loss. Therefore, the loss of $1,200 on line 8 is entered as an ordinary gain in Part II on line 12. The loss is also subtracted from the $2,000 gain on line 7. The $800 balance is entered on line 9.

Jane entered into a like-kind exchange by trading her business real property for other business real property, so she must report the transaction on Form 8824 and attach the form to her tax return.

On lines 16 and 17 of Form 8824, Jane enters the fair market value of her new property, $120,000, consisting of $95,000 for the building and $25,000 for the land. On line 18, she enters the adjusted basis of the old property, $100,000, consisting of $17,687 for the building and $82,313 for the land. Her realized gain on line 19 is $20,000. Under the like-kind exchange rules, this gain is not recognized. Jane enters “-0-” on line 20.

However, because there is additional depreciation of $4,405 on the old building, Jane must determine whether any of her gain has to be recognized as ordinary income under the recapture rules. The old building has an FMV of $90,000. Had the transaction been a cash sale, Jane's realized gain on the building would have been $72,313 ($90,000 - $17,687). The additional depreciation is less than that amount, so her ordinary income due to the additional depreciation would have been $4,405. That amount is less than the $95,000 fair market value of the new building, so there is no ordinary income recognized on the exchange. The $4,405 ordinary income that does not have to be reported is carried over to the new building as additional depreciation. Jane enters “-0-” on Form 8824, line 21 and Form 4797, line 16.

All of Jane's $20,000 gain is deferred (line 24). The basis of her new property (line 25) is $100,000, the same as the adjusted basis of her old property. Of that amount, $79,167 [($95,000 ÷ $120,000) × $100,000] is allocated to the building and $20,833 [($25,000 ÷ $120,000) × $100,000] is allocated to the land.

The entries in Part II, Form 4797, show an ordinary gain of $4,200 that is carried to Form 1040, line 14.

The entries in Part I, Form 4797, result in a long-term capital gain of $800 from section 1231 transactions. This is carried to Schedule D (Form 1040), line 11, column (f).

Form 4797 pg 1

Form 4797 pg 2

Form 8824 pg 1