But you can still treat it as resulting in Ordinary Income even though it is reported on Schedule E, which lets you properly report in accordance with the tax results it seems you are shooting for under the tax return loophole.If your CPA is looking at switching it between schedules to get that tax result...it sounds like they don't understand the reporting position fully and/or they just don't know how to use their own software to address it.In summary, based on what you are describing for the situation, it should go on Schedule E, with what sounds like the resulting refund of $17k.

I know people pay over the appraisal in competitive markets but my situation is not ordinary.

Lenders earn no depreciation and actually its worse because the interest you earn is taxed at ordinary income rates.

Tenant pays for almost everything, including HOA, property taxes, ordinary R&M.

I think the sale triggers a change from passive to active and it can be used to either lower basis or offset capital gains/depreciation recapture and if any is left your ordinary income.  

You will pay ordinary income tax on that interest.

Your total tax % on long term capital gain income is very unlikely to be as low as 15% -- but it's still almost certainly lower than ordinary income.   ** Christie makes a good and important point that just paying the tax up front will give you greater flexibility in terms of reinvestment options. 

If the walls have to be repainted, that indicates something beyond "ordinary" wear and tear. 4.

Reason I ask is most do not realize the interest income is taxed at ordinary income rates, so if you are in a higher tax bracket, that 8% you are getting ends up being in the mid 5's, which is basically the equivalent of a CD right now but just a lot more added risk.

Check rules on her 401k with her employer ( vested, not vested) and with her accountant.If she takes the money out and puts it in her personal checking account that will be considered ordinary income and she will owe, state and federal tax, plus penalites and maybe SSI.