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First cap gains is not a bad thing to be avoided ... so if the rental is working well you can just keep the home.
However if you want to use the personal residence exclusion you have to live in the home for 2 of the last 5 years prior to the sale.
You will have to recapture the depreciation taken or allowed as ordinary income even if the cap gain can be excluded ... review all your options before you do anything rash.
Capital gains is not always a bad thing. If the house is in descent shape and you have good tenants, and it's producing a positive cash flow, keep it. Especially if there is no mortgage on the house. Is there a mortgage? For me, if there was no mortgage on the house then I don't care about capital gains. I'm gonna keep the property and do my best to keep it rented for as much rent as I can get, for as long as I can get it. I say that from personal experience because of the three rental properties I own, one of them is paid off and the cash flow more than exceeds any capital gains I will pay when I sell. Remember, capital gains is capped at a maximum of 25%. After putting a bit aside each month for property taxes and insurance, that paid off rental property produces $1150 cash flow every month for me. I don't give a damn about capital gains when I sell. As it stands now, I have no intention of selling it though.
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