a simple example of depreciation recapture ignoring the home sale exclusion
original tax basis $200
depreciation taken or should have been taken $30
net tax basis $170 ($200- $30)
sell for $470 after holding for more than 1 year
gain = $300 ($470 - $170)
$270 of the gain would be taxed at your long-term capital gain rate(s)
$30 of gain is section 1250 (depreciation) recapture taxed at a special rate (up to $25%) depending on your other income
now let's consider the home sale exclusion
note that with a home sale depreciation must be recaptured before the home sale exclusion can be applied.
if you qualified for the maximum home sale exclusion you would still pay recapture taxes on the $30
then the exclusion comes in so you would pay long-term capital gain taxes on only $20.
as noted you will not get the maximum exclusion if your current ownership starts while it is still rental property.
