@SUTUMA first need a little clarification:
(a) how did you acquire the house in India? (b) when did you acquire it ; (c) did you use it as your main home and if so till when; (d) when did you convert this to rental/income property ( i.e. when did you first advertise for rent); (e) have you been using schedule-E to report the rental income/expenses/depreciation etc ever since ; (f) are you US citizen/Resident ( Green Card ) / Resident for tax purposes and lastly (f) are you married.
All these answers will help setup the situation as it exists. Generally you report the sale as of the current state of the property -- so if at the sale the property was rental then you report is as rental property sale and not as also a home sale. The sales are treated the same way i.e. a converted property ( home to rental ) still includes the effects of the depreciation to the basis of the property inc computing the gain. The treatment of the gain and the exclusion thereof are generally first the allowable "recovery/clawback" then the rest of the gain either as capital gain or excluded gain.
Please provide the answers so we can go forward with the rest
Namaste
pk
