When one has rental real estate, the sale of that property can have significant tax ramifications. Some of these are good, while others can create significant tax liabilities.

First, the good news. If there were losses that could not be deducted due to the passive activity rules, these losses may be deducted on Schedule E in the year of sale, assuming the property is sold in a taxable transaction.

Determining gain or loss on the sale can be a daunting task. Due to depreciation recapture, the gain and tax can be much larger than anticipated.

As far as the sale itself is concerned, first determine the adjusted basis. This starts with is the original cost plus any capital improvements. These are improvements to the house that were not expensed when incurred, but depreciated over time.

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