Example Jane Smith is single. At the beginning of 1999, she owned andoperated Jane's Dress Shop. On March 16, she traded the land andbuilding where she operated her dress shop for other land and abuilding. She then opened the J. Smith Hardware Store. Jane also soldall the equipment she had used in her dress shop, as well as a vacantlot across the street from the shop used for customer parking. Shereports these transactions as shown in the filled-in Form 4797 andForm 8824 at the end of this chapter. Form 4797 Jane sold the equipment she used in her dress shop for $3,000. Sheoriginally paid $6,000 for it on January 20, 1986, and had fullydepreciated it. She realized a gain of $3,000. Because the gain wasless than the $6,000 depreciation taken, all her gain is ordinaryincome from depreciation. This amount is reported in Part III of Form4797 and entered in Part II on line 13. The adjusted basis of the vacant lot (acquired in 1978) was $6,000and its sales price was $8,000. Jane reports her $2,000 gain from thesale in Part I of Form 4797. luxury hotels in LeuvernJane had a nonrecaptured net section 1231 loss of $1,200. She showsthis amount in Part I on line 8. Since the net section 1231 gain of$2,000 is more than the nonrecaptured loss, that gain is treated asordinary gain only up to the amount of the loss. Therefore, the lossamount of $1,200 on line 8 is entered as an ordinary gain in Part IIof Form 4797 on line 12. The loss is also subtracted from the $2,000gain on line 7. The $800 balance is entered on line 9. Form 8824 Because Jane entered into a like-kind exchange by trading herbusiness real property for other business real property, she mustreport the transaction on Form 8824 and attach the form to her taxreturn. Hamburg hôtelsOn lines 16 and 17 of Form 8824, Jane enters the fair market value(FMV) of her new property, $120,000, consisting of $95,000 for thebuilding and $25,000 for the land. On line 18 she enters the adjustedbasis of the old property, $100,000, consisting of $56,151 for thebuilding and $43,849 for the land. Her realized gain on line 19 is$20,000. Under the like-kind exchange rules, this gain is notrecognized. Jane enters "-0-" on line 20. Dianamarka HotelesHowever, because there is additional depreciation on the oldbuilding of $14,143, Jane must determine whether any of her gain hasto be recognized as ordinary income under the recapture rules. The oldbuilding has an FMV of $90,000. Had the transaction been a cash sale,Jane's realized gain on the building would have been $33,849 ($90,000- $56,151). The additional depreciation is less than thatamount, so her ordinary income due to the additional depreciationwould have been $14,143. That amount is less than the $95,000 FMV ofthe new building, and there is no ordinary income recognized on theexchange. The $14,143 ordinary income that does not have to bereported is carried over to the new building as additionaldepreciation. Jane enters "-0-" on line 21 of Form 8824 and online 16 of Form 4797. All of Jane's $20,000 gain is deferred (line 24). The basis of hernew property (line 25) is $100,000, the same as the adjusted basis ofher 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] isallocated to the land. Summary The entries in Part II, Form 4797, show an ordinary gain of $4,200,which is carried to line 14, Form 1040. The entries in Part I, Form 4797, result in a gain of $800 fromsection 1231 transactions. This is treated as long-term capital gainand carried to line 11, Schedule D (Form 1040), column (f). Form 4797 pg 1 Form 4797 pg 2 Form 8824 pg 1