Hi, It will be a mix of capital gains and ordinary income just like EA said. The portion that was depreciable over the years you rented it out will need to be "recaptured" at ordinary income tax rates. There is no way that I know of to avoid this on sale of rental property unless you (1) do a like kind exchange, (2) move back into it for a number of years to try to get treatment on sale of personal primary residence, or (3) don't sell it and instead let a loved one inherit the property, in which case they get a stepped up tax basis when they inherit it....so the tax basis in the property is reset to the valuation at time of your death, or 6 months after. So they can then sell and end up paying very little in capital gains. oh yes... even if you try to avoid the section 1250 recapture by not claiming depreciation over the life of the rental, you still end up paying on it because the IRS rules have you compute the "allowable" depreciation in computing gain on sale of rental property.
As for option 2, I am still looking at that as I believe rules have changed and I have not looked at the rules in a long time. at one time you only needed to live in it for 2 years but thought I recently heard about a longer 5 year period. Regarding option 1, I had heard like kind exchanges could go away with new tax law but never heard if it actually happened.
Best wishes!!!!!! :smile: