“ Are there any tax implications we should be aware of with this plan?”---->UNLESS you have your primary residence in your home state(NOT in NYS), if you decide to move into a rental property and make(CONVERT) it your primary residence, then many states have Homestead exemption laws that allow you , pty owner,to pay reduced taxes on youir primary residence.ALSO, you get the $250,000($500,000 as MFJ filer) exclusion if you have owned and lived in the home for a total of two years out of the last five. Section 121 of the Internal Revenue Code allows a gain of up to $250,000 ($500,000 if you are married and file jointly) with no tax obligation when you sell a house used as a primary residence for two of the previous five years. You don't even need to occupy the property for two consecutive years during the five year period; just two years out of the five in any form.
“For example, should we take out depreciation on the house and improvements?”----> The IRS refers to ordinary and necessary expenses in reference to rental property; Rental property provides owners with several tax benefits.So, rental depreciation is one of the most beneficial tax deductions because it is a noncash expense. Rental deductions are allowed only based on business use of the property. If a rental property is used personally to a certain extent, all expenses including depreciation must be prorated to reflect only the amounts attributed to business use. You can deduct your depreciation on Sch E of 1040.However, when you dispose of the property( as either rental or residential pty), you should recapture depreciation on the rental proeporty. Depreciation recapture can cause a significant tax impact for people who are selling residential rental properties. Part of the gain will be taxed as a capital gain and may qualify for the maximum 15% rate on long-term gains. The part of the gain that is related to depreciation, however, will be taxed at a maximum 25% rate.However, as long as your primary residence exclusion( as I assume that you convert your rental pty as your primary residence) exceeds your LTCG generated on the sale of the property, then you are NOT subject to r/e depreciation recap rule.