We never made a profit in any year it was being rented
Guess what? It's extremely rare for residential rental property to actually show a taxable profit on paper. But weather you made money or not really doesn't matter. The IRS looks at "intent". So if your "intent" was to make a profit, then it's classified as residential rental real estate and all income/expenses is reported on SCH E as a part of your personal tax return.
The reality is, rental property will practically always show a loss "on paper" every single year you rent it; especially if the property has a mortgage on it. That's because after deducting the mortgage interest, property taxes, rental dwelling insurance and the depreciation you're required to take by law, those four items alone will generally exceed any "profit" you may have actually made. Add to that the other rental expenses and you're practically guaranteed to show ever increasing losses each passing year that just get carried forward.
So weather you actually made a taxable profit or not is really irrelevant. If it was rented out then it can be rather difficult to prove to the IRS that your intent was "not" to make a profit. When you sell, you are required to recapture all prior year's deprecation on the property and it's included in the taxable income. But the taxability of most (if not all) of that recapture will be offset by the carry forward losses. In the year you sell you are allowed to actually "realized" all that carried forward loss first against any taxable gain on the sale. Then the remaining loss if any, is claimed against other "ordinary" income. (Such as W-2 income for example.)
Next, depending on your AGI (which will be higher if you sold at a gain) the losses you can actually "take" that year could be limited to as low as $3K. Then any remaining losses you couldn't claim are carried forward to future years and can be taken against other ordinary income in those future years.
