Gain or Loss From Sales and Exchanges: Business Property Sales (2025 IRS Guide)

This guide covers “Gain or Loss From Sales and Exchanges” within business property sales. The following material presents the IRS treatment of this topic, including the qualifications, exceptions, and examples in the source section. Read the rules alongside the facts of your own situation before deciding what to report, deduct, or document.

Adapted from Publication 544 (2025), Sales and Other Dispositions of Assets, published by the Internal Revenue Service. This guide retains the source edition’s years, amounts, deadlines, and examples. It is guidance for that edition, not a statement that the same figures apply to every tax year.

Context for these rules

A sale is a transfer of property for money or a mortgage, note, or other promise to pay money. An exchange is a transfer of property for other property or services. Property sold or exchanged may include the sale of a portion of a Modified Accelerated Cost Recovery System (MACRS) asset (discussed later).

The following discussions describe the kinds of transactions that are treated as sales or exchanges and explain how to figure gain or loss.

Gain or Loss From Sales and Exchanges

You usually realize gain or loss when property is sold or exchanged. A gain is the amount you realize from a sale or exchange of property that is more than its adjusted basis. A loss occurs when the adjusted basis of the property is more than the amount you realize on the sale or exchange.

Table 1-1. How To Figure Whether You Have a Gain or Loss

Basis.

You must know the basis of your property to determine whether you have a gain or loss from its sale or other disposition. The basis of property you buy is usually its cost. However, if you acquired the property by gift or inheritance or in some way other than buying it, you must use a basis other than its cost. See Basis Other Than Cost in Pub. 551.

Inherited property.

If you inherited property and received a Schedule A (Form 8971) that indicates that the property increased the estate tax liability of the decedent, use a basis consistent with the final estate tax value of the property to determine your initial basis in the property. Calculate a basis consistent with the final estate tax value by starting with the reported value and then making any allowed adjustments. See the Instructions for Form 8971. Also, see the Instructions for Form 8949 for details on how to figure the basis and make any adjustments. In addition, see the Instructions for Form 8949 and the Instructions for Form 8971 for penalties that may apply for inconsistent basis reporting.

Adjusted basis.

The adjusted basis of property is your original cost or other basis increased by certain additions and decreased by certain deductions. Increases to basis include costs of any improvements having a useful life of more than 1 year. Decreases to basis include depreciation and casualty losses. In the sale or exchange of a portion of a MACRS asset (discussed later), the adjusted basis of the disposed portion of the asset is used to figure gain or loss. For more details and additional examples, see Adjusted Basis in Pub. 551.

Amount realized.

The amount you realize from a sale or exchange is the total of all the money you receive plus the fair market value (defined below) of all property or services you receive. If a debt instrument is issued by the buyer to you in the sale or exchange, the amount you realize from the sale or exchange generally includes the issue price of the debt instrument. See Amount realized in Pub. 550. The amount you realize also includes any of your liabilities that were assumed by the buyer and any liabilities to which the property you transferred is subject, such as real estate taxes or a mortgage.

Fair market value (FMV).

FMV is the price at which the property would change hands between a buyer and a seller when both have reasonable knowledge of all the necessary facts and neither is being forced to buy or sell. If parties with adverse interests place a value on property in an arm’s-length transaction, that is strong evidence of FMV. If there is a stated price for services, this price is treated as the FMV unless there is evidence to the contrary.

Example 1.

You used a building in your business that cost you $70,000. You made certain permanent improvements at a cost of $20,000 and deducted depreciation totaling $10,000. You sold the building for $100,000 plus property having an FMV of $20,000. The buyer assumed your real estate taxes of $3,000 and a mortgage of $17,000 on the building. The selling expenses were $4,000. Your gain on the sale is figured as follows.

Example 2.

You own a building that cost you $120,000. You use the building in your business. The building is a MACRS asset. You replaced the old elevator in the building and sold it for $1,000. You determine the cost of the portion of the building attributable to the old elevator is $5,000. Depreciation deducted on the old elevator portion of the building was $2,500 before its sale. The sale of the elevator is a sale of a portion of a MACRS asset, the building. Your loss on the sale of the elevator is figured as follows.

Example 3.

You own a bulldozer that cost you $30,000. You use the bulldozer in your business. The bulldozer is a MACRS asset. You replaced the old bucket on the bulldozer and sold it for $800. You determine the cost of the portion of the bulldozer attributable to the old bucket is $4,000. Depreciation deducted on the old bucket portion of the bulldozer was $3,800 before its sale. The sale of the bucket is a sale of a portion of a MACRS asset, the bulldozer. Your gain on the sale of the bucket is figured as follows.

Amount recognized.

Your gain or loss realized from a sale or exchange of property is usually a recognized gain or loss for tax purposes. This includes a gain or loss realized from a sale or exchange of a portion of a MACRS asset. Recognized gains must be included in gross income. Recognized losses are deductible from gross income. However, your gain or loss realized from certain exchanges of property is not recognized for tax purposes. See Nontaxable Exchanges, later. Also, a loss from the sale or other disposition of property held for personal use is not deductible, except in the case of a casualty or theft loss.

Interest in property.

The amount you realize from the disposition of a life interest in property, an interest in property for a set number of years, or an income interest in a trust is a recognized gain under certain circumstances. If you received the interest as a gift or an inheritance or in a transfer from a spouse or former spouse incident to a divorce, the amount realized is a recognized gain. Your basis in the property is disregarded. This rule does not apply if all interests in the property are disposed of at the same time.

Example 1.

Your parent dies and leaves the farm to you for life with a remainder interest to your younger sibling. You decide to sell your life interest in the farm. The entire amount you receive is a recognized gain. Your basis in the farm is disregarded.

Example 2.

The facts are the same as in Example 1, except that your sibling joins you in selling the farm. The entire interest in the property is sold, so your basis in the farm is not disregarded. Your gain or loss is the difference between your share of the sales price and your adjusted basis in the farm.

Canceling a sale of real property.

If you sell real property under a sales contract that allows the buyer to return the property for a full refund and the buyer does so, you may not have to recognize gain or loss on the sale. If the buyer returns the property in the same tax year of sale, no gain or loss is recognized. This cancellation of the sale in the same tax year it occurred places both you and the buyer in the same positions you were in before the sale. If the buyer returns the property in a later tax year, you must recognize gain (or loss, if allowed) in the year of the sale. When the property is returned in a later tax year, you acquire a new basis in the property. That basis is equal to the amount you pay to the buyer.

Bargain Sale

If you sell or exchange property for less than FMV with the intent of making a gift, the transaction is partly a sale or exchange and partly a gift. You have a gain if the amount realized is more than your adjusted basis in the property. However, you do not have a loss if the amount realized is less than the adjusted basis of the property.

Bargain sales to charity.

A bargain sale of property to a charitable organization is partly a sale or exchange and partly a charitable contribution. If a charitable deduction for the contribution is allowable, you must allocate your adjusted basis in the property between the part sold and the part contributed based on the FMV of each. The adjusted basis of the part sold is figured as follows.

Based on this allocation rule, you will have a gain even if the amount realized is not more than your adjusted basis in the property. This allocation rule does not apply if a charitable contribution deduction is not allowable.

See Pub. 526 for information on figuring your charitable contribution.

Example.

You sold property with an FMV of $10,000 to a charitable organization for $2,000 and are allowed a deduction for your contribution. Your adjusted basis in the property is $4,000. Your gain on the sale is $1,200, figured as follows.

Property Used Partly for Business or Rental

Generally, if you sell or exchange property you used partly for business or rental purposes and partly for personal purposes, you must figure the gain or loss on the sale or exchange separately for the business or rental part and the personal-use part. You must subtract depreciation you took or could have taken from the basis of the business or rental part. However, see the special rule, later, for a home used partly for business or rental. You must allocate the selling price, the selling expenses, and the basis of the property between the business or rental part and the personal part.

Gain or loss on the business or rental part of the property may be a capital gain or loss or an ordinary gain or loss, as discussed in chapter 3 under Section 1231 Gains and Losses. You can’t deduct a loss on the personal part. Any gain or loss on the part of the home used for business is an ordinary gain or loss, as applicable, reportable on Form 4797. Any gain or loss on the part producing income for which the underlying activity does not rise to the level of a trade or business is a capital gain or loss, as applicable. However, see Disposition of depreciable property not used in trade or business in chapter 4.

Home used partly for business or rental.

If you use property partly as a home and partly for business or to produce rental income, the computation and treatment of any gain on the sale depends partly on whether the business or rental part of the property is considered within your home or not. See Business or Rental Use of Home in Pub. 523.

Property Changed to Business or Rental Use

You can’t deduct a loss on the sale of property you purchased or constructed for use as your home and used as your home until the time of sale.

You can deduct a loss on the sale of property you acquired for use as your home but changed to business or rental property and used as business or rental property at the time of sale. However, if the adjusted basis of the property at the time of the change was more than its FMV , the loss you can deduct is limited.

Figure the loss you can deduct as follows.

1. Use the lesser of the property’s adjusted basis or FMV at the time of the change.

2. Add to (1) the cost of any improvements and other increases to basis since the change.

3. Subtract from (2) depreciation and any other decreases to basis since the change.

4. Subtract the amount you realized on the sale from the result in (3). If the amount you realized is more than the result in (3), treat this result as zero.

The result in (4) is the loss you can deduct.

Example.

You changed your main home to rental property 5 years ago. At the time of the change, the adjusted basis of your home was $75,000 and the FMV was $70,000. This year, you sold the property for $55,000. You made no improvements to the property but you have depreciation expenses of $12,620 over the 5 prior years. Although your loss on the sale is $7,380 [($75,000 − $12,620) − $55,000], the amount you can deduct as a loss is limited to $2,380, figured as follows.

Gain.

If you have a gain on the sale, you must generally recognize the full amount of the gain. You figure the gain by subtracting your adjusted basis from your amount realized, as described earlier.

You may be able to exclude all or part of the gain if you owned and lived in the property as your main home for at least 2 years during the 5-year period ending on the date of sale. However, you may not be able to exclude the part of the gain allocated to any period of nonqualified use.

For more information, including special rules that apply if the home sold was acquired in a like-kind exchange, see Pub. 523. Also, see Like-Kind Exchanges, later.

Using the guidance

Keep the documents that establish the dates, amounts, and circumstances described above. References to other chapters, forms, worksheets, or earlier and later sections refer to the linked IRS publication. Check the full publication and its updates before relying on a rule for a different tax year or a situation not addressed here.

Sources and further reading

• Publication 544 (2025), Sales and Other Dispositions of Assets: Gain or Loss — Sales and Exchanges — Gain or Loss From Sales and Exchanges — Internal Revenue Service; 2025 edition.

The cited U.S. government text is in the public domain. Source accessed October 28, 2026. Fynoptic has organized this material for educational use and is independent of, and not endorsed by, the IRS.