Hi NancyNet from deal, minus business expenses (incl mileage, business overhead, education, travel to 'find' more business, etc) = taxable income.Get an investor friendly CPA/tax person to instruct on all your write-offs, and take them.

Subtract that number from your anticipated net sale and that would be your taxable gain.Here's a couple options1.

I need a lawyer when we decide to form our first LLC for the rental, and I also am in need of an ambitious tax person that can help us find a balance between minimizing our taxable income vs. investing more money in our real estate portfolio. 

@Reid ShafenbergThere is no going back and un-doing that move.I would assume based on your description that the $5,000 distribution was reported by the 401(k) administrator as a taxable distribution to you. 

@William Huston, One of the best strategy relating to proper use of Mortgage is to offset your mature properties income with newer properties interest deduction. 1) Mature properties will start to show more taxable income as interest payment decreases with time. 2) So, use newer properties to offset those income. 

you don't want to take your 200k tax free gain and turn it into a taxable number … so if it was me I would either sell the home take the tax free gain and figure out what to do next.or I would stay in it..

It's hard to comprehend this but appearently there is this mortgage boot event that's causing the taxable event.

On the contrary, the military provides stable W-2 income, VA loan benefits, a non-taxable housing allowance, and other perks. 

This would also be the preferred method if they paid less than $200k for the property as all those gains are tax free now but will be taxable after 2 years as a rental. 

If I invest in an individual note, the periodic payments are considered taxable interest.