First, establish your adjusted cost basis on the property.
Adjusted Cost Basis = What you paid for the property, plus what you paid for any property improvements incurred while you owned the property.
From that total subtract your total depreciation taken on the property for the entire time you owned it.
This gives you your adjusted cost basis.
Now subtract the adjusted cost basis from your sale price. (We're ignoring selling expenses for now, as this can only be a rough estimate.) This gives you your reportable gain.
From your reportable gain subtract your passive activity losses. If you have a positive amount left over, it's your taxable gain and you're done.
If the subtraction of your passive losses gets your taxable gain to zero, any remaining losses can be deducted from "other" ordinary income up to a maximum of $3000 per year, until all those losses are used up.
Note that if you are an active participant in the rental activity, you can also deduct an additional maximum of $25,000 from your "other" ordinary income in the tax year you sell the property, provided the property was classified as rental property during that tax year you sell the property.
