What is " supplemental social security payment"? If that is extra pension your employer gives you until you reach age 62, then it is fully taxable income, like most employer retirement.
Q. will I loose some of the 110 k I made from the house in penalties?
A. No and maybe. There are no "penalties" for anything your have described. However, all your income is added together to determine at which rate your capital gain (from the rental sale) is taxed. In simple terms, any additional income you have (including supplemental retirement), pushes more of your capital gain into the 15% (or higher) bracket, from the 0% rate.
Keep in mind that the "depreciation recapture" portion of your gain is all taxed as ordinary income. It is not eligible for capital gains rate (none of the recapture was eligible for the 0% rate, regardless of your other income).
