Reduce capital gains tax liability from rental property sale

[Naeem Kapasi]

I was talking to a landlord who is thinking about selling her rental property in San Antonio, TX. We were talking about capital gains taxes that she will have to pay when selling her rental. The rental is worth about $220k. Now I am not a CPA so I don't know anything about this topic. She had two questions, which I don't know the answers to, so I'm asking y'all, and whoever knows about this topic, please speak up :)

1) If she sells her rental the traditional way, and gets all her money out at once as a lump sum, can she put that money towards paying down the mortgage on her primary residence to reduce the capital gains taxes?

2) If the buyer obtains seller financing from her, does that reduce her capital gains tax liability?

3) What other options does she have to reduce her tax liability? She is 87 years old and does not want to buy another investment. She just wants the money from the rental as that's her life savings.

Thank you in advance for any feedback!

[Linda Weygant]

@John Underwood is correct.

Further discussion for #2 though....  The capital gains in this scenario is spread out over the life of the loan.  This can be very tax advantageous for the seller because to the extent you can engineer this, she could possibly pay zero tax on this if she can keep her total income for each year under her deduction amount.  (There's a bit more to it, including an understanding of her total other income sources, possible taxation of capital gains at 0% for certain income levels, etc.  But that's a bit beyond the scope of this answer)

This is a win/win because she still gets the benefit of monthly payments on the sale and interest income, but without the headache of owning the property.

The kicker, as always, is the depreciation recapture.  The depreciation recapture has to be claimed all in year 1 and if she has owned the property for a long time, this can be a significant amount of taxes owed.