My sis and I own a home that we used to rent out. We moved in to this property in 2005. We are planning on selling this house some time in 2014. Do we have to pay capital gain taxes? How about the depreciation taken on the house when it was a rental, do we have to do anything with that? We also have a vacation home and we are planning to move in it after the sale
of our main residence.

#1;It depends; however, as you can see, on the disposition of the home(now as a residential home), you MUST recapture uncaptured r/e depreciation taxed as ordinary income at 25%. In general, as once you owned a home converted to rental unit that has a substantial amount of equity, and you moved into it in 2005 before you sell it. Doing so can save you substantial capital gains taxes on your profit. Perhaps the greatest boon in the tax law for property owners is the $250K as single /$500K as MFJ home sale exclusion. There is no limitation on how many times the exclusion may be used during your lifetime.To qualify for the home sale exclusion, you must own and occupy the home as your principal residence for at least two years before you sell it. Your two years of ownership and use can occur anytime during the five years before you sell—and you don’t have to be living in the home when you sell it.However, a special rule enacted in 2009 limits the $250K/$500K exclusion for homeowners who initially use their home for purposes other than their principal residence, such as a rental or vacation home. The rule requires you to reduce pro rata the amount of profit you exclude from your income based on the number of years after 2008 you used the home as a rental, vacation home, or other “nonqualifying use.”For example, say,you buy a home on January 1, 2009 for $400K, and uses it as rental property for two years. On January 1, 2011, you evict your tenants and move into the house, thereby converting it to your principal residence. On January 1, 2013, you move out and rent it again. You then sell the property for $700K on January 1, 2014. You have a $300K gain (profit), $700K-$400K, on the sale.You owned the house for a total of five years( in your case 9 years;2005-2014) and used it as a rental property for two years before yopu converted it to your residence. Thus, two of the five years (40%),2/5, before the sale were a nonqualifying use, so 40% of her $300K gain ($120K) does not qualify for the exclusion. This means that you must add $120K to your gross income for the year. Your remaining gain of $180K is less than the $250K exclusion, so it is excluded from your gross income. Converting a rental into your residence will not eliminate all taxes when you sell it. While the home was a rental, as said above, you should have claimed a depreciation deduction for it each year. The total amount of depreciation you claimed during the rental period is not eligible for the exclusion. Instead, you must "recapture" all your depreciation deductions that is report them on IRS Sch D and pay a flat 25% tax on these deductions. This can have a significant tax impact. In the example above, if you had taken $10K in depreciation deductions during the time she rented out the home, you would have to pay a deprecation recapture tax of $2,500 (25% x $10K = $2,500).

Note; Non-qualifying use means the property is not being used as a primary residence by either the homeowner or the homeowner's spouse. For the purpose of calculating capital gains, the period of non-qualifying use is any period of time the property is not being used as a main home that begins on or after January 1, 2009. Non-qualifying use prior to January 1, 2009, is disregarded for the the purpose of determining the capital gain allocation.So aslong as you rented it before Jan 1 2009, you are NOT subject to nonqualifying use rule.owever, if yu rented it out after jan 1 2009, then you are subject to the rule.
Once you occupy the home as your personal residence, you will no longer be able to take any of the deductions you took when the property was a rental. This means you will get no depreciation deduction and you can't deduct the cost of repairs. However, you will be entitled to the deductions provided to homeowners,that is, you may deduct a personal itemized deduction on IRS Sch A of 1040 the amount of your mortgage interestas long s youitemize deductions, mortgage insurance premiums, and even property taxes. The expenses must be prorated for the time the home was not considered a rental property.

#2;As mentioned above; youmust recapture the depre taken on the rental pty as ordirnaty incoerm taxed at 25% as long as your marginal tax rate is 25% or higher; however, as long as yu take a loss / or passive loss c/f (and passive loss c/f > depre recap)on the sale of your home, then, you do not need to recapture the depre.

#3;You can apply the same exclusion rule, I mean the LTCG exclusion rule, to the vacation home as long as you use it as your primary home.You who sell your primary residence can exclude up to $250K (or up to $500K for married couples filing jointly) in capital gains from your taxes. The amount of gain that will qualify for the exclusion is limited based on the amount of time that the house is used as a primary residence.Again, if the house is used other than as a primary residence, capital gains must be allocated between qualifying and non-qualifying use. Any non-qualifying use can potentially reduce the amount of capital gain that can be excluded. Qualifying use means the property is being used by the homeowner or the homeowner's spouse as a primary residence.