Rental property sale gain calculation and Form 4797 reporting

Quick answer: Based on the numbers you gave, your realized gain is roughly $60,000 (sale price minus adjusted basis), but I can't give you a final, filing-ready figure without knowing your depreciation deductions taken during the rental period and your selling expenses — and importantly, a second home you never lived in doesn't qualify for the home-sale exclusion, so this gain is reported as rental/business property gain, not under the Section 121 home-sale rules.

Walking through what the documents support

This is not a "principal residence" sale. The Section 121 exclusion rules in Publication 523 apply to your main home — a property you owned and lived in for at least 2 of the last 5 years. Nothing in your facts suggests you lived in this property; it was a rental. So the Pub. 523 exclusion, worksheets, and examples (like Taylor's or Finley's) don't apply here. Instead, this is a sale of business/rental real property, reported on Form 4797, not the home-sale worksheets.

Basic gain calculation. The general formula illustrated in the documents (using Pub. 523's Worksheet 2 logic, which mirrors the standard gain formula) is: amount realized minus adjusted basis. Adjusted basis is generally your cost plus improvements, minus depreciation taken. Using your numbers:

• Cost: $280,000
• Improvements: $30,000
• Unadjusted basis: $310,000
• Less: depreciation deductions you claimed during the rental period (you haven't told me this amount)
• = Adjusted basis

Gain = $370,000 (sale price) − Adjusted basis (selling expenses would also reduce the amount realized, and you haven't mentioned any).

Depreciation recapture matters. Because this was rental property, any depreciation you deducted (or were entitled to deduct) reduces your basis and converts part of your gain into unrecaptured section 1250 gain, taxed differently than ordinary long-term capital gain. As Publication 523 explains in an analogous rental example: Taylor had deducted $27,000 for depreciation for the period of rental to a third party. Taylor can't exclude the part of the gain equal to the depreciation claimed after May 6, 1997, for renting the house ($27,000). This is unrecaptured section 1250 gain.¹ The same recapture concept applies to your property's depreciation, even though your sale won't use the home-sale exclusion at all.

More generally, Publication 544 explains: Gain on the disposition of section 1250 property is treated as ordinary income to the extent of additional depreciation allowed or allowable on the property.²

Reporting. A sale of rental real property is reported using Form 4797 and flows to Schedule D as applicable — for a sale, exchange, or involuntary conversion of business property, complete Form 4797³.

Rental income. The $5,000 in rental income you received is reported separately as ordinary rental income (Schedule E) during the years you earned it — it does not factor into the gain-on-sale calculation.

What it depends on

• Depreciation claimed/allowable on the property during the rental period (this is the missing number needed to compute adjusted basis and recapture).
• Selling expenses (commissions, closing costs) that reduce the amount realized.
• Whether you held the property as an investment (capital asset) vs. a business asset used in a trade or business, which affects whether it's a capital gain, Section 1231 gain, or ordinary — this depends on your facts.

Given the depreciation-recapture and Form 4797 mechanics involved, and the amount of money at stake, it's worth having a CPA prepare the actual computation and confirm proper reporting on your 2025 return.