I would like to better understand Form 4797. I am looking at a 2006 tax return and it has $150,000 for Line 6 “Gain from Line 32, from other than casualty or theft”.
I flip the page to Part III of Form 4797 and see that my borrower sold an apartment building for a gain of $150,000. Should I include this income? My gut says yes. My borrower’s business is real estate, so I would say this practice will happen more than once.
If you have my 1040 manual, you’ll find the discussion about Schedule D (2006 page 2-30 through 2-35) helpful. Whether reported on a Schedule D or a Form 4797, gain/loss from a real estate transaction is just that, *taxable* gain or loss.
If you need to know the cash flow impact of a real estate transaction, you need the closing documents.
You want the impact on cash flow: Sales price minus the underlying contract or mortgage paid off in the transaction.
The Form 4797 gives you the taxable gain or loss: Sales price minus the basis adjusted by depreciation.
Those can be significantly different amounts. I recommend that if you want to use cash flow from real estate transactions (which I agree is totally appropriate when your borrower’s business ‘is real estate’, you get closing statements on the direct transactions, K-1s for any LLCs/LPs that are real estate related and include actual cash flow on any properties currently held as rentals.