Seek competent legal/accounting/tax help before doing this. It's complicated.
That said;
Q. Do we both qualify for the full $500k?
A. Yes. Your spouse(s) must also meet the 2 year residency rule, but does not need to meet the ownership rule.
Q. Will we be subjected to the non qualified use rule for the years the property was rented prior to us receiving it as a gift?
A. Yes. The gain will be prorated between the residence time and the rental time. So, yes, the years prior to receiving it as a gift do count for the new (different) owners. Only "non qualified use" after 2008 is included in the calculation.
Q. Will we be subjected to any depreciation recaptured that occurred from depreciation claimed prior to us receiving the property as a gift?
A. Yes. Your cost basis is the gift giver's basis, including any deprecation "allowed or allowable". Deprecation since May 6, 1997 must still be recaptured, even in a home sale exclusion situation.
Reference: https://www.kitces.com/blog/limits-to-converting-rental-property-into-a-primary-residence-to-plan-fo...
A question you didn't ask:
Q. Will Dad be subject to the gift tax filing requirement?
A. Yes, depending on how the $15,000 exemptions are split up. But "Gift Tax" is somewhat of a misnomer. Even though a gift tax return may be required, very few people ever actually pay federal gift tax. The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption.
See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/...
