half the proceeds, closing costs and half the purchase cost would be entered on the home sales worksheet. this should be no federal income taxes because your net gain will be less than the $500,000 home sale exclusion available when either the husband or wife owned the home for 2 years out of 5 years before sale and both occupied the house as their principal residence for 2 out of 5 years before the sale. the other 1/2 of the proceeds and sales costs get entered on the Schedule E for the rental in the disposition section for the asset. any depreciation taken would be recaptured as section 1250 gain. the gain in excess of this is capital gain. the taxes you'll pay depends in part on your other income in the year of sale. the 1250 gain has a maximum rate of 25% while the pure capital gain would be taxed at a maximum rate of 20%. if you live in a state with income taxes you'll owe state income taxes as well on the rental portion. can't say if you'll owe any state taxes on your residential portion.
