Hello again Angela,
I apoligize for the delay in responding. The JA website just went off line for no apparent reason and I was unable to get back in the forum until just now.
Using the money from the sale to pay off a mortgage does not lower your tax liability. It does not change the gain you had from the sale. The current mortgage is not taken in to account when calculating your gain. It also does not matter that this is the only property you ever owned.
As far as the improvements you made to the property, the cost of those improvements can be added to your purchase price to increase your basis. Improvements cover everything except for routine minor repairs. Improvements would include such things as a new roof, new carpeting, new tile, new plumbing, new HVAC units, repaving the driveway, putting up a fence, etc. Any improvement you make which is expected to have a normal life of one year or more qualifies to be added to your basis. So you can increase your basis by those amounts and this will help reduce the portion of the gain on which you owe the 15% tax. The 25% you owe on the depreciation will remain the same.
As far as using the money to buy another residence -- you can participate in what is called a 1031 Exchange of properties. This is when one investment property is sold and the proceeds are used to purchase another like kind investment property. If you were to choose that alternative, then the taxes would be deferred until such time as you sell the second replacement property. At that time, the very same rules would apply. But if you plan to simply purchase a home that you will use yourself as a residence or a vacation home or anything else other than another rental property, then taxes will be due on the sale of the first condo.
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Thank you Angela