Capital Gains on a Rental Property

[Chris Hughes]

Hello all!  I've been reading on this website for quite some time and it is a treasure trove of useful information.  I am posting this to try and help my mom make an informed decision about whether or not to sell an income property she currently owns and any input is greatly appreciated!

Scenario:

Income property purchased in early 2015 using a 5/30 ARM with about a 4.25% interest rate. Terms of the loan state that after 5 years it can go up as much as 2.5% in a year to a maximum of 5% for the life of the loan. Purchased the house for $215,000 and invested about $25,000 for a new roof and other repairs and now it is valued at around $315,000.

The current mortgage payment is just shy of $1,000 /month including taxes and insurance and it rents for $1,950 /month. Not bad for 2 years time. But in 3 years when the ARM kicks in, the mortgage payment will certainly go up, diminishing the overall monthly profits from the home.

Option A: 

Keep the Home. Refinance the 5/30 ARM into a 15 or 30 year fixed. Invest another $15,000 in HVAC and other repairs. Risk losing value as we face uncertainty with where the real estate market is headed.

Option B: 

Sell the Home.  Face capital gains taxes.  

Questions:

*Assuming a $100,000 profit from selling the home and about $10,000 in depreciation (just a guess), how much capital gains would my mom face on the sale?

*Would all of my mom's income be subject to the rate that she pays the capital gains at?  She is retired in Florida and receives social security income as well as some taxable income from a retirement account.  

*She would use the profit from selling the investment property to pay down some debt and be debt free. She owes $40,000 on a HELOC on her primary residence and about $15,000 on a vehicle. In your opinion would it be better to sell and take the tax hit? Or keep the property and not pay down the debt?

*Will her normal income be taxable at the capital gains rate as well?

Thank you for any advice you may have!!