If it sounds too good to be true...
MJ, I'd recommend you post the real estate question at Vanguard's <a href="
http://socialize.morningstar.com/Ne...000001&t1=1042730421&t1=1109346277">Investing DURING Retirement</a> board. There are several CPAs over there and many posters, including BruceM, with real estate experience. (I'll warn you in advance to ignore "Avilynn", an 80ish curmudgeon who tends to be even more opinionated & combative than me.)
You could also try BruceM and the other CPAs at Ed Slott's <a href="
http://www.irahelp.com/cgi-bin/forum/index.cgi/">IRA discussion</a> board. One of them writes for Investopedia. The professional answers seem to come mostly from Mary Kay Foss, Bruce Steiner, and Denise Appleby.
Having directed you (hopefully) to the RIGHT answers, here's what I think. IRS rulings have determined that although home offices can be tax-deductible their deduction is also subject to recapture upon the sale of the house. I think that you're in a similar situation with your rental. While you may own title to the entire property, the rental portion is not entitled to the cap gains exclusion. In fact, if you've depreciated it on Schedule E, you'll have to pay recapture tax on the depreciation. Even worse, the new roof (and other repairs affecting both the owned and the rented parts of the property) should have been apportioned between the two categories as well. Part of the cost of the new roof raises your homeowner's basis while the other part applies to the rental property's depreciation. But it all depends on how well you can document what you were renting out when you were making repairs or improvements.
Having said that, I think you're still eligible for the full amount of your cap gains deduction. If your deduction is $250K, then that full deduction would apply to the portion of the residence's sale price that was your primary residence. So when you sell the house, you'd deduct $250K from the gains on the portion of the house that was your primary residence.
Another approach would be to boot out the tenants, avoid renting for two years to claim that the entire house is your primary residence, and then sell. Unfortunately any rental-property depreciation would still be subject to recapture.
In today's market perhaps you'd be ahead by selling now, even after you pay a pitbull CPA to sort out the situation.
TH, I'll let one of the above-mentioned CPAs point you to the tax code or the PLRs.
Back to StevelB's question: The answer is yes. Initially a conversion may seem like a wash, but it also allows you to defer income instead of stuffing RMDs down your throat (which may bump you into a higher tax bracket, in addition to taxing your SS). Deferring the income gives it more time to compound tax-free to be withdrawn as you deem fit instead of IAW the IRS' tables. You'll have to decide whether you do the conversion all at once or whether you defer SS while you accomplish the conversion over several years. (SS deferral is a complicated individualized decision that's been beaten to death here on several other threads.)
One additional benefit that BruceM points out-- when the conversion tax is paid with funds outside the IRA, the net effect is a contribution boost to the new Roth by the amount of the tax. IOW all of the converted IRA is now compounding tax-free, not just the after-tax portion of the conversion. Some calculators point out this difference, many do not.