400K plus improvements less the land value, when acquired, is depreciable (the lesser of cost or fair market value). depreciation recapture is always required when there is a gain on sale up to the amount of the gain. The code requires this. gain is figured as selling price less selling expenses less tax basis in the property.
Tax basis in the property is
the $400K(which includes the land) plus the cost of improvements less depreciation allowed or allowable.
so say you used it a a principal residence for 3 years
rented it for 5 years
then used it as a personal residence again for 7 years
thus total ownership 15 years
your home sale exclusion will be reduced because of nonqualified use (rental) irc Sec 121(b) (5)
period of nonqualified use 5 years
period of ownership 15 years
gain say $210K
gain not qualifying for home sale exclusion 5/15 X 210K or $70K
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sec 121(b)
(5)Exclusion of gain allocated to nonqualified use
(A)In general
Subsection (a) shall not apply to so much of the gain from the sale or exchange of property as is allocated to periods of nonqualified use.
(B)Gain allocated to periods of nonqualified use
For purposes of subparagraph (A), gain shall be allocated to periods of nonqualified use based on the ratio which—
(i)the aggregate periods of nonqualified use during the period such property was owned by the taxpayer, bears to
(ii)the period such property was owned by the taxpayer.
(C)Period of nonqualified use
For purposes of this paragraph—
(i)In general
The term “period of nonqualified use” means any period (other than the portion of any period preceding January 1, 2009) during which the property is not used as the principal residence of the taxpayer or the taxpayer’s spouse or former spouse.
(ii)Exceptions
The term “period of nonqualified use” does not include—
(I)any portion of the 5-year period described in subsection (a) which is after the last date that such property is used as the principal residence of the taxpayer or the taxpayer’s spouse,
