To my understanding, the recovery of depreciated value on rental real estate is, because of section 1250, treated as capital gains (though there can sometimes be a somewhat increased rate for the cap gains). As for material participation, I specified that I actively participate, but that I am not a real estate professional.
I should add that I had a CPA do these taxes because it was an unusual tax year, and he did not come to the same conclusion as Turbotax. He had no net income from the sale shown on 8582 Part I - 1a (nor 3a). He did have an amount in line 19 of schedule D.
My purpose in doing this work is that even though the CPA did these taxes already, I normally use Turbotax and not a tax person, and I want to get all of this into Turbotax so it will flow properly into my following years taxes. Also, you never know, it could be that the CPA made a mistake. (I do have carryover real estate partnership losses for another property that Turbotax is showing are offsetting the ordinary income gain, so if Turbotax is correct it might be good - so getting this right could be important.). Also, if this is a bug in Turbotax then I assume it is important for you folks to get this figured out.
