You can go the traditional route of simply selling your rental real estate or you can be adventurous and explore some other techniques. Let's look at the traditional method before we get into the more complicated strategies: a like-kind exchange and an installment sale. You may also want to consider other selling options for your vacation home.

If you have ever sold a piece of real estate, the process of selling rental real estate won't differ much. The tax treatment, however, is different than if you were to sell your principal residence.

When you sell your principal residence, the IRS generally allows you to exclude up to $250,000 of gain ($500,000 for married couples filing a joint return).

These rules do not apply to the sale of investment property and vacation homes. Let's look at an example:

Ben sold his vacation home for $125,000. He paid $75,000 for the home and rented it out for part of the years that he owned it. He took depreciation deductions totaling $5,000. The gain on the sale is calculated as follows:

Ben cannot defer or exclude any of the $47,500 gain on the sale. He is required to pay income tax on the entire amount.

The cost basis of rental real estate and vacation homes is reduced by any depreciation expenses claimed while it is rented. All the other rules that apply to increasing and decreasing basis in selling a residence apply.