Brent,I'm by no means an expert, but I have turned several personal residences into rentals over the past few years and had to deal with the tax reporting consequences.First, I'd suggest that you look at IRS Publications 523 Selling Your Home, 527 Residential Rental Property, and 551 Basis of Assets, which you can download from www.irs.gov. Second, you DID have potential deductions for 1998... namely any points you paid, and the prepaid interest that was rolled into the closing costs. Depending on the total for these two amounts, you may or may not have had enough deductions to make itemization worthwhile.I am not aware of any difference between renting your house on the open market vs renting your house as part of a sale, at least as far as the IRS is concerned. If they are equivalent as I think they are, then here is some more info...You will have to file a Schedule E for 1999 and (I think) for 2000 to report the rental income and expenses. As part of Schedule E, you will depreciate the property.I've never sold a house before, so I can't say for sure what you do in the year of the sale for depreciation OR expenses (I think that I will seek professional help should I ever sell one of my rentals!)Your expenses aren't what you paid to the mortgage company, they are quite different. For example, you may have paid property taxes out of your escrow in 1999 that were for 1998 taxes, that amount isn't a rental expense, because you lived in the property at the time the expenses were incurred. Also, you probably paid property insurance at closing or out of your escrow, and any part of that amount that covered the period the property was rented is now a rental expense.The depreciation will be based on the date the property was 'placed in service' and the 'cost basis' of the property on that date. I've always included some (otherwise undeductible) closing costs in the cost basis, for example, survey cost, and the cost of any improvements you made while you lived in the property (landscaping, wallpaper, gutters). Regarding capital gains, the '2 out of 5 year' rule may apply, I think MF Taxes has posted info about this.Hopefully MF Taxes will come along and fill in the blanks and not find that I made alot of errors on my taxes, I don't want to have to file amended returns!JA
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