Ok ... in the simplest terms ... the depreciation is recaptured first then any cap gains after that is eligible for the exclusion. The depreciation portion of the profit is recaptured as ordinary income and taxed at your marginal rate.
Purchase price + cost to buy + improvements = the cost basis
Cost basis - depreciation taken or allowed = adjusted cost basis
Sales price - (adjusted cost basis + cost of sale) = profit
Profit - depreciation = gain allowed to be excluded
