here an example. the mortgage amount is irrelevant for determining taxable gain
assume you qualify for the full home ale exclusion
the depreciation you are required to take is the $1010K less the value of the land when purchased. the net is depreciated over 27.5 years but if you want you can use ADS depreciation that uses a 30 year live.
for this example assume the land had a value of $210,000 when bought., thus the buildings has a tax basis of $800,000 over 2 years using the 27.5 year life, depreciation would be about $58,000
selling price net of capital selling expenses assume $1,400,000. your gain is $1,400,000 - (1,010,000-58000) or $448,000. you are taxed on the $58,000 in depreciation. The remaining $390,000 qualifies for the home sale exclusion.
