I have rented a rental home for 20 years. I have shown the required depreciation and expenses for the property on Sch E and have accumulated a large carryover loss on Form 8582 because of income limitations. I disposed of the property this year and I'm not sure how to report everything. I thought I report the sale on Form 4797 by showing my gross proceeds and adjusted basis - original purchase plus improvements and expense of selling . Then on the next line it sates to put depreciation. I assume even though I didn't deduct it all every year because iII had to carry it forward, I still show it. I read some where that the total carryover loss can now be added to my basis but I'm not sure if thats correct. The software I'm using is carrying the large carryover loss to the front page of Form 1040 and wiping out all my income. Is this correct? Any pointers would be greatly appreciated.

“ I have shown the required depreciation and expenses for the property on Sch E and have accumulated a large carryover loss on Form 8582 because of income limitations.”----> Correct; you need to add depreciation deducted throughout your ownership of the rental property.
“ I disposed of the property this year and I'm not sure how to report everything.”---->The passive activity losses that have not been allowed from your rental property in previous years including the current year generally are allowed in full in the tax year you dispose of the entire interest in the property. The passive loss form 8582 rolls to the tax year when you sell the rental property. Your previous PAL amounts are merged. If you have an overall gain, you claim it. if you have an overall loss, you might get to take some of it, but only if you actively participate in the property which can be hard to do long distance. If the suspended loss allocated to that property is greater than the gain on sale, the entire suspended loss allocated to that property may be deducted. It’s deductible regardless of whether there is a net overall suspended loss for the property. Form 8582 can run until you sell the property.You need to claim the depreciation. Since it's rental property, you CAN'T claim the interest/taxes on schedule A of 1040. As you said, you need to use Schedule E.
“ I thought I report the sale on Form 4797 by showing my gross proceeds and adjusted basis - original purchase plus improvements and expense of selling .”----> You need to enter the sale proceeds on line 1 of Form 4797. The proceeds will be reported to you on form 1099-S that will be mailed to you by January 31 of the year following the sale. You also skip Parts I and II of Form 4797 since they do not apply to the sale of rental real estate. You should fill in Part 3 of Form 4797, 19a,b,c,d. 20,( Skip lines 25, 27, 28 and 29. These sections do not apply to rental homes.),26, 32 and report the amount (on line 32) on line 6, 7. You will also enter the result on Schedule D, line 11, long-term capital gains. Do not record anything in lines 8, 9, 11 or 12 on Form 4797 since these do not apply to rental homes. The gain from the sale of the rental home will be included with the other gains reported on Schedule D and be reported on line 13 of Form 1040.On Sch D of 1040, you need to report the amount on Form 4797 on line 7 on Sch D line 11 &16, and also you need to complete the Qualified Div. and Capital Gain Tax W/S.
“ Then on the next line it sates to put depreciation. I assume even though I didn't deduct it all every year because iII had to carry it forward, I still show it. I read some where that the total carryover loss can now be added to my basis but I'm not sure if thats correct.”--->Correct; any unused passive activity loss (depreciation is part of the losses) remains at sale time, it's added to your basis in calculating your gain for capital gain tax purposes. Also you need to claim depreciation as it is subject to recapture when you dispose of the rental property, whether you claim it or not while you hold the property as a rental. The wording in the Tax Code is "depreciation allowed OR ALLOWABLE” so not claiming it will STILL cost you in the long run.I guess since the use of the straight line method is required for real property acquired after 1986, there will be no Section 1250 recapture on the disposition of such property. Instead, a special 25% tax rate applies to your rental property gains attributable(if you sell the property in gain) to depreciation previously taken and not already recaptured under the Section 1250 rule. What I mean is that assume that your LTCG is $100,000 and your accumulated straight line depreciation on the building at the time of sale is $50,000 and if your tax bracket is higher than 15%, then $50,000 of the gain, $100,000, is attributable to unrecaptured depreciation and is taxed at 25%, while the remaining $50,000; $100,000-$50,00, gain is taxed at the 15% LTCG tax rate.
“ The software I'm using is carrying the large carryover loss to the front page of Form 1040 and wiping out all my income. Is this correct?”--->I am NOT familiar with the software.

You state that Form 8582 should be completed for 2010 (year property was sold) yet everything I read states in the year of disposition, if you have an overall loss you don't file the Form. Maybe I don't understand how to determine the loss. I simply took my original basis added improvements and selling expenses then subtracted out depreciation as Form 4797 states to do. You state that I can add my unsed passive carryover losses to the basis. What I read yes I can add that to determine if I have an overall gain or loss to see if I need to file Form 8582 but the actual gain reported on Form 4797 which is then carried over to Schedule D would not have the unsed carryover losses added to the basis. If I did that the losses would wipe out the gain plus I know you can use these losses on page 1 of the 1040 to wipe out all other categories of income. Perhaps we are on the same page but not saying it the same. Thanks!