Should I report property flip gain on Form 4797 or Schedule D for S-Corp rental business?

The key factor here is determining whether the property was held primarily for sale to customers in the ordinary course of business. Based on what you've described, it sounds like this was an opportunistic one-time flip, not part of their regular business model of acquiring rental properties. For an S-Corp primarily in the rental real estate business, Schedule D would generally be the appropriate form for reporting this gain since the property wasn't acquired with the intent to flip and wasn't part of an ongoing flipping operation. This would treat the gain as a capital gain rather than ordinary income. If the client had a history of flipping properties or if this was part of a new business direction, then Form 4797 (or even Schedule C reporting) might be more appropriate. But a one-off opportunity taken advantage of by a company that otherwise holds properties long-term for rental income points toward Schedule D treatment.

I was in literally the exact same situation last year with my S-Corp (own multiple rentals but did a quick flip). After spending hours researching and getting nowhere, I finally used taxr.ai (https://taxr.ai) to analyze my situation. You upload documents or just describe your specific tax scenario, and they give you a detailed analysis with citations to relevant tax code. For my situation, they identified that since this was an isolated transaction outside my normal rental business, and I didn't have a history of flipping properties, Schedule D was appropriate. The report even provided court case references where similar situations were ruled in favor of capital gain treatment. Saved me from potentially reporting it incorrectly and creating audit flags.

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If you're having trouble getting clear answers about your S-Corp situation, you might want to try getting official guidance directly from the IRS. I had a similar issue last year and spent WEEKS trying to get through to someone who could actually help. After multiple 2+ hour hold times and getting disconnected, I found Claimyr (https://claimyr.com). They have this system that basically calls the IRS for you, waits on hold, and then calls your phone when an actual IRS agent picks up. You can see how it works here: https://youtu.be/_kiP6q8DX5c. I was super skeptical but desperate enough to try anything. Within 45 minutes, I was talking to a real IRS agent who walked me through my specific S-Corp reporting question. For situations like yours where there's ambiguity between forms, getting direct IRS guidance can save you major headaches down the road.

So I have to admit I was wrong about Claimyr. After posting my skeptical comment, I decided to try it myself because I had been trying to reach the IRS about a CP2000 notice for weeks with no luck. The system actually worked exactly as described. I got a call back in about 70 minutes and was connected to an IRS representative who was able to explain my notice and confirm that my response documentation was sufficient. Saved me at least 3-4 hours of hold time I'd already wasted trying to call them directly. For what it's worth, I also asked a hypothetical about S-Corp property sales similar to the original post, and the agent directed me to the specific section in Publication 544 that addresses when property sales should be treated as capital assets vs. ordinary income. Not as detailed as talking to a tax pro, but definitely helpful for initial guidance.

Returning to the original question about Form 4797 vs Schedule D, there's actually a multi-factor test that courts have used to determine if real estate is held primarily for sale to customers (ordinary income) vs. as an investment (capital gain): 1. Frequency and number of sales 2. Development activity/improvements made 3. Solicitation and advertising efforts 4. Relationship to taxpayer's regular business 5. Purpose of acquisition In your case, points in favor of Schedule D: it's a one-time sale, not part of regular business model, and presumably minimal improvements if flipped in 10 days. Points against: very short holding period and substantial profit relative to rental income. I'd document your position carefully in case of audit.

Not to muddy the waters, but have you considered the possibility that this might be Section 1231 property? If so, neither Schedule D nor reporting it as ordinary income on the front of the return may be correct - Form 4797 might still be relevant but for different reasons.

Based on all the discussion here, I think you're on the right track with Schedule D treatment, but I'd strongly recommend getting this reviewed by someone with deep S-Corp expertise before filing. The short holding period (10 days) is really the biggest red flag that could invite IRS scrutiny. One thing I haven't seen mentioned - make sure you're also considering the impact on your client's QBI deduction. If this gain ends up being treated as ordinary business income rather than capital gains, it could affect their Section 199A calculation. The characterization of this transaction could have ripple effects beyond just the immediate tax on the gain. Also, given that this is a $135K gain, the stakes are high enough that it might be worth investing in a private letter ruling if your client is concerned about audit risk. It's expensive but would give you definitive guidance for this specific situation.