We are hoping to sell our rental home that we purchased in May 2012. We lived in it until December 2012 and have had renters in the home ever since. We will definitely be making money on the home, as the market has done really well during the past 2 years. What are the penalties that we may face for tax purposes?

Is this your primary home converted to rental home??If it is, then, when you elected to convert your home to rental property, you claimed the rental income and expenses, including depreciation, on Sch E. however, The depreciation claimed during the rental period is considered unrecaptured Section 1250 gain and is not eligible for the exclusion. This portion of the long term gain is reported and taxed up to a maximum rate of 25 percent on Sch D.so aslongas the amoun t of unrecap sec 1250 gain exceeds your LTCG, then you need to pay25% on the LTCG , NOT 0% ~15%.If you convert the rental back to primary home, and was your principal residence for the first 2 of the 5 years ending on the date of the sale of the property, then you can exclude the gain on the sale minus sec 1250 gain. In general, you can exclude from federal income taxes the gain from the sale up to $250k if you are single, or $500k if you are married.

However, unless you converted the rental pty to primary home, then, Selling a rental property is going to cost you much more in capital gains tax than selling a personal-use property. First, you need to calculate the adjusted basis of your rental property. The adjusted basis is the purchase price of the property plus any capital improvements you made, such as a new deck, a new air-conditioning system or a swimming pool. For example, if your rental property cost $100k and you invested $20k in capital improvements, the adjusted basis is $120k.
If you subtract any depreciation you claimed on the property. The IRS allows landlords to deduct property depreciation from the income generated by a rental property. However, the catch is you must later recapture as said above, it from the adj basis when calculating the capital gains tax. For example, if, throughout the years, you claimed $30k in depreciation, and the adj basis was $120k, $100k+$20k,, you would end with a basis of $90K, $120k-$30k DEPRE TAKEN ON TE RENTAL PTY. IF YOU subtract the adj basis from the sale price of the rental property. If you sold the property for $150k and the adj basis was $90k, the capital gain is $60k.then you must multiply the capital gain by your tax bracket rate. Your tax bracket varies depending on the size of your income. For example, if your tax bracket is 30 percent and you have a capital gain of $60k on your rental property, your capital gains tax would be $18k; 30%* $60K of LTCG. If, instead of a capital gain, aslongas you had a capital loss on the sale of the rental property, then, you can deduct it from your income tax and nO depre recapture as you took a loss.

SOrry for that; my bad; the LTCG tax is $4.5K, 15%*$30K, NOT $18K, 30%*$60K.in ti case total tax= 25%*$30K+$30K*15%(aslongas your marginal tax rate is higher than 15%)$12K.
The gain on the sale of the rental house is reported on Form 4797 and Sch D/8949. Residential rental property is section 1250 property, so Part III of Form 4797 must be completed. The gain calculated in Part III then needs to be entered in Part I of form 4797. The gain reported in Part I will then transfer to Sch D as a LTCG. For property placed in service after 1986, all depreciation deductions allowable before the sale give rise to unrecaptured section 1250 gain. The portion of the gain that is unrecaptured section 1250 gain is subject to a 25% tax rate and must be reported in Part III of Sch D. The capital gains rate of 15% will apply to the balance of the gain. Got that?
please make a note of this.