If you did not get the gain exclusion under this section, you will need to include this sale under the sale of home section under the personal income tab>personal income>less common income>sale of home. Please note that the gain exclusion will NOT reduce the gain recapture that you will need to recognized for all depreciation taken on the rental property.
When you sell your property, you must pay 25 percent recapture tax (also referred to as Section 1250 recapture) as well as regular state income tax on the depreciation you claimed. (Remember the IRS will assume that you claimed the correct amount of depreciation every year—this is true regardless of whether you actually claimed any depreciation on your tax return). These two factors may cause your capital gain amount and capital gains rate to be higher than you might have expected.
What you will do is dispose of the assets under the rental section so that no capital gain or loss is reported (you may have to manipulate the assets sales amounts to get the sales to get an overall net "0" for all the rental asset capital gains and losses).
You will want to write down the total amount of depreciation take on each rental asset (accumulated depreciation plus current year depreciation) that was included with the rental property sale (rental house plus capital improvements). You will need this amount when reporting your sale of home. (This would be the total deprecation amount taken on the property - This question will come up under the home sales section).
When you get to the end of this section, the total amount of capital gain should equal all depreciation taken (or assumed taken) on this converted home to rental property. This is the depreciation recapture amount.
