We have a contract on our home to sell it, found a zone issue, will take 6mo to fix. If we rent it to buyer and then sell it after 6mo, how will we be taxed on the gain?

[DoninGA]

If you sold your primary personal residence and you lived in and owned the home for at least two years in the five year period on the date of sale, you do not have to report the sale if your gains are less then the exclusion amounts of $250,000 if filing Single or $500,000 if filing Married Filing Jointly (and both lived in the home for two years).

If you had a gain greater then the exclusion amounts then you would have to report the sale. Also, if you received a Form 1099-S for the sale either with a gain or a loss, the sale has to be reported.

You report the rental income and expenses on a Schedule E.  The home is listed as an residential renal property asset and depreciated for the period of time it was a rental.  The depreciation is recaptured at the time of sale and you will owe capital gains on the depreciation recapture.  If rented for only 6 months then the depreciation will be minimal and the gains on the recapture will also be minimal.