Capital Gain / Gift of Equity
Last September my wife and I sold our 2-family house to my in-laws for $325,000. This price included a $125,000 Gift of Equity use as a down payment for the house. Therefore, we received $200,000 minus $145,000, mortgage balance. We bought the house for $165,000 and lived in one of the apartments for 4 years. I understand since we lived for more than two years we are excluded to pay Capital Gain taxes on 50% of the house. I know that we have to pay capital gains on the 50% rental portion. But I'm confused if we should paid capital gains on half of the $325,000 minus half of the $165,000. Or half of $200,000 minus half of the $165,000. I really will appreciate any advice. Thank you. 
FChavy33,
Let's assume that you have not made any capital improvements and that you took a depreciation expense on the "rental/investment" half of the property each year. Let's also assume that both units are roughly equal in size and amenities, so that they are equal in value.
Using your $165000 purchase price and your $325000 sale price, it appears that your total profit on the deal was $160000. Since only half of this is applied to your primary residence, your capital gain exclusion can only be applied to $80000 of your profit.
The other $80000 is a long term capital gain on the sale of investment property, which carries a maximum tax rate of 20%. In addition, you will have depreciation recapture to deal with at a tax rate of 25%. Of course, your actual numbers will be adjusted by your selling expenses.
Your gift of equity is reported on a Gift Tax Return (Form 709) and filed with your 1040. If both you and your wife agree to consolidate your gifts to her parents, then $44000 of your gift is tax free. The remaining $81000 is a gift in excess of your tax free exclusion. Even though an actual gift tax may not need to be paid, a gift tax return is still required.
Now, if your parents leave this property to you in their wills, you could potentially inherit this property with a basis equal to its full market value. If you decide to keep it as investment property, you can take advantage of your "stepped up" cost basis in establishing your depreciation schedule.