@ccthealias as I understand the situation:
(a) you have owned a duplex for five years ( at least ) and composed of unit A and Unit-B
(b) Unit has been always a rental unit and therefore reported on Schedule-E every year and depreciation recognized. Now it has been sold, you report this sale on form 4787, and on to Schedule-D -- for capital gains treatment. Note that that portion of the gain that is due accumulated depreciation needs to be treated as ordinary gain and not capital gain.
(c) Unit B was a rental property for the first two years and recognized on Schedule-E including depreciation ( accumulated ) for those two years. Now it has been sold and you meet the gain exclusion eligibility ( of US$250,000 ), i.e. at least two years of ownership and 730 days total of main residence usage within the last five years. However, your basis in the property is reduced by accumulated depreciation allowable during its rental period and the gain is affected. Again not that that portion of the gain that is due to the accumulated depreciation, is treated as ordinary gain.
Does this help ? Is there more I can do for you ?
