It's not considered "earned" income for tax purpose as are wages and self-employment profit.
You will pay taxes on the entire profit (the sales price plus depreciation allowable minus your investment over the years minus expense of sale).
Here's a little additional info with some instructions (pay particular attention to the Definitions at the bottom):
You can reduce the selling price of the rental property by the amount of the sales expenses, including the realtor fees. Doing this will either reduce your capital gains or increase your loss on the property, depending on your individual circumstance- either way, it may reduce the amount of taxes to be paid on the sale. TurboTax will make these calculations for you, you just need to enter the data.
In TurboTax, follow these steps to enter the sale of your rental:
1. With your return open in TurboTax, search for rentals and then click the "Jump to" link in the search result.
2. Answer Yes to the question Did you have any rental or royalty income and expenses?
3. When you get to Is this a rental property or royalty? select Rental property and fill out the description, address, and owner.
4. When you hit Do any of these situations apply? you'll definitely want to check the Sold box along with any other boxes that may apply.
5. Continue following the onscreen prompts to enter info about your rental property. Eventually, you'll get to the Rental Summary screen. Here, you can report the sale in the Sale of Property/Depreciation section, along with any other pertinent info (income, expenses, etc.)
Tip: Take your time and pay close attention; there's a lot of info and it's easy to miss if you're in a hurry.
Follow the prompts to enter information about the sale of your rental. As you go through the interview, these terms and definitions may be helpful:
· Sales Price – If you received a Form 1099-S, look in Box 2 (Gross Proceeds), which will generally be your contract sales price.
o You can also use the Gross Proceeds amount from your settlement closing statement.
· Sales Expenses for selling your property include:
o Sales commissions
o Advertising Expenses
o Legal Fees
o Broker Fees
o Transfer taxes
· Cost Basis is the rental's purchase price plus buying costs (fees you paid in connection with the purchase such as legal fees, abstract fees, survey charges, owner's title, etc.) plus improvements, minus depreciation.
· Adjusted basis is the rental's purchase price plus buying costs plus improvements plus sales expenses, minus prior-year depreciation.
