The total taxable gain is being included in your total capital gains on Schedule D and then carried to your Form 1040, Line 7. It does not double your depreciation portion of the gain as part of your income. The depreciation recapture portion is separately stated on your Schedule D, Line 19 to specifically identify this as the part of the taxable gain that is taxed as ordinary income so that it will not be confused with special capital gain treatment.
When the tax for your total income is calculated beginning on the Schedule D tax worksheet line 11, shows the breakdown of the different incomes and applies the correct tax to each type. This is always used when capital gains are part of the return so that you get the lowest tax possible. The depreciation recapture must be taxed at your regular tax rate and the remainder of the taxable gain is taxed at the special capital gains rates which are maxed at 20% in your case.
Your home sale exclusion is fully tax free as you know. Please update here if you have more questions and one of our tax experts will help.
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