The form you use to report a loss on the sale of rental real estate depends on whether or not the rental property was used in a trade or business. Generally, an activity qualifies as a trade or business if your primary purpose for engaging in the activity is for income or profit and you are involved in the activity with continuity and regularity. The facts and circumstances of each case determine if an activity is a trade or business.

If you used the rental real property in a trade or business, report the loss on the sale on Form 4797, Sales of Business Property. The loss is deductible and is reported in either Part I or Part II of Form 4797, depending on whether you held the property for more than one year.

If you held the rental property for more than one year, then report the loss in Part I of Form 4797. The loss is aggregated with the gains and losses from the sale or exchange of other property used in a trade or business that was held for more than one year. If there is an overall loss, then such a loss is reported as an ordinary loss. However, if there is an overall gain, then such a gain is reported as a long-term capital gain.

If you held the rental property for one year or less, then report the loss in Part II of Form 4797. The loss will be an ordinary loss.

If you used the rental real property in an activity that was primarily for profit, but did not rise to the level of a trade or business (such as because it was not regular and continuous, or it was an investment), report the loss on the sale on Form 8949, Sales and Other Dispositions of Capital Assets. The loss is deductible and is reported in either Part I or Part II of Form 8949, depending on whether you held the property for more than one year.

If you held the rental property for one year or less, then report the loss in Part I of Form 8949. The loss will be a short-term capital loss.

If you held the rental property for more than one year, then report the loss in Part II of Form 8949. The loss will be a long-term capital loss.

If you used the rental real property in an activity that was not primarily for profit, then the loss on a sale is not deductible.