How can we help? Call us at 360-455-1569 or email Info@LindaKeithCPA.com.
default-logo

Form 4797 gain in cashflow?

Your question:

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.

Linda says:

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.

About the Author
Linda Keith CPA is an expert in credit risk readiness and credit analysis. She trains banks and credit unions throughout the United States, both in-house and in open-enrollment sessions, on Tax Return and Financial Statement Analysis. She is in the trenches with lenders, analysts and underwriters helping them say "yes" to good loans. Creator of the Tax Return Analysis Virtual Classroom at www.LendersOnlineTraining.com, she speaks at banking associations on risk management, lending and director finance topics.