Based on your numbers, you have a reportable gain. The fact that your sale price is between FMV and original price is irrelevant. In my case, my sale price was between FMV and adjusted basis so there was neither a loss nor a gain.
SALE PRICE: $325k
ADJUSTED BASIS: $357k + $20k - $56k = $321k
GAIN: $325k - $321K = $4K
Since you sold a depreciable property (i.e., subject to Section 1250 recapture), you must report the sale in Part III (see item 1(a) in the table on page 1 of Form 4797 instructions). And since your gain is less than depreciation, the entire gain is taxed as regular income, not as a capital gain.
HOWEVER, you're supposed to separate the land from the building when reporting the sale.The land always gets listed in Part I (or Part II if sold in less than a year). You must be able to substantiate the land value or ratio you use for reporting the sale (typically from appraisals or property tax valuations).
This may work to your advantage if the land appreciated from 2006 and 2020. For example, if land represented $35k of the original cost and $40k of the sale price, the land would show a $5k gain and the building would show a $1k loss. In this case the building gets reported in Part I since it showed a loss (the building only gets reported in Part III if it has a gain!). In this example, you would have a $4k long term capital gain. The capital gains tax rate is either 0%, 15% or 20%, depending on your tax bracket. Capital gains are only taxed as regular income if the depreciable asset has a reportable gain.
SALE PRICE: $325k
ADJUSTED BASIS: $357k + $20k - $56k = $321k
GAIN: $325k - $321K = $4K
Since you sold a depreciable property (i.e., subject to Section 1250 recapture), you must report the sale in Part III (see item 1(a) in the table on page 1 of Form 4797 instructions). And since your gain is less than depreciation, the entire gain is taxed as regular income, not as a capital gain.
HOWEVER, you're supposed to separate the land from the building when reporting the sale.The land always gets listed in Part I (or Part II if sold in less than a year). You must be able to substantiate the land value or ratio you use for reporting the sale (typically from appraisals or property tax valuations).
This may work to your advantage if the land appreciated from 2006 and 2020. For example, if land represented $35k of the original cost and $40k of the sale price, the land would show a $5k gain and the building would show a $1k loss. In this case the building gets reported in Part I since it showed a loss (the building only gets reported in Part III if it has a gain!). In this example, you would have a $4k long term capital gain. The capital gains tax rate is either 0%, 15% or 20%, depending on your tax bracket. Capital gains are only taxed as regular income if the depreciable asset has a reportable gain.
