The property was purchased in Dec 2013 for $60k, $20k rehab fair market value is $130k.Case Aif I sell the property to myself at $80k my understanding is:i) zero capital gains tax (as cost base includes rehab so cost = $80k, sales is $80k)ii) zero income taxii) whatever depreciation i claimed in 2014 I need to write back and pay 25% onCase Bif I sell the property to myself at $120k my understanding is:i) Capital gain of $120-$80k = $40k taxed at around 25%ii) zero income taxiii) whatever depreciation I claimed in 2014 I need to write backUNLESS I do a 1031 exchange.  

So other than going with a state income tax, a capital gains tax seems like a fair option.  

You'd have to pay capital gains tax as well as all the transaction fees of selling which would eat into your equity.

My advice, work with a tax a professional in your area and out the details of your situation, let them read your strategic plan, and help you identify the correct structure.

Owes no capital gains tax as the amount she received was under the 250,000 exclusion.She hasn't been required to file taxes for years and years as she is retired and only gets a very small social security check each month that falls under the annual income minimums.She lives in an apartment basement now in my brother-in-law's house.Does she need to report she sold her house to the IRS for taxes even though no taxes are owed and she hasn't filed in years?? 

Unlike passive rental income, the income from an active trade or business is subject to self employment tax (a nasty 15% tax commonly referred to a "social security and medicare" by working folks).

Usually if she's not at the age to take the money out (59 1/2), she can borrow against the account and if she doesnt return before specific time, she may get charged with penalty and tax as capital gain. 

I thought it might be a good exercise to measure annual real estate tax as a percentage of annual gross rents.

I was able to go to the bank and set up my business account with my SAO and business registration the same day.

A post that may help is here: https://www.biggerpockets.com/forums/12/topics/760...In addition as @Brandon Hall was correct that short term rentals can cause tax as well.