Yes, you will have to pay capital gains tax
on the sale, unless you invest the money in to another like-kind investment property
When you sell a home that can be classified as your primary residence, you are allowed to exclude $250,000 (or $500,000 if married filing
a joint return
) from the gain before any taxes are due. But since this home you rented to your parents does not qualify as your primary home, no exclusion can be applied.
When you sell investment property, capital gains tax becomes due in the year of the sale on any gain you have. The only way to defer the gain is by participating in what is called a 1031 Exchange, where you reinvest the proceeds in to another investment property.
So if you were to do this and use the money to purchase another rental property
then you could defer the tax on the sale. But the deferral would not apply simply by using the money to put back in to the mortgage you have on your current residence.
I am sorry I could not give you more options on this, but under current regulations
, the only option to defer taxes on the sale of a rental property is by participating in a 1031 Exchange.
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Thank you cjw and let me know if you have more questions. I am happy to help you with whatever I can.