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It is important that you keep clear and concise records of the rental income and expenses so that the potential buyer is able to analyze the information in making an informed decision. Usually, your income tax return will suffice.

The IRS complicates the area of selling rental property by throwing in some twists that make it different than selling a home. Here are the main ones that you need to be concerned about:

1. Your basis in the property (cost) is reduced by any depreciation deductions. This lowering of your basis results in a higher potential gain on which you pay income tax. The gain attributable to depreciation is taxed at a maximum rate of 25%. The balance of the gain is taxed as capital gain.
2. Any passive losses that could not be claimed in the past year due to the passive activity loss limitations, can be claimed in the year you sell the property. These losses can be used to reduce any category of income.

IMPORTANT NOTE: Consult your tax professional to determine how these rules will impact the sale of your rental property.

SUGGESTION: Sales of rental property are reported on IRS Form 4797—Sale of Business Property.