You are required by federal law to take depreciation. Period.
If you do not depreciate the property, then in the tax year you sell you are still required to recapture the depreciation you "should" have taken, and you will pay taxes on it.
Understand that even if you qualify for the "lived in 2 of last 5" capital gains tax exclusion rule, you will still pay tax on recaptured deprecation *no* *matter* *what*. Recaptured depreciation is not included in the exclusion.
Note that if you did not take the depreciation as required by federal law, then what you "recapture" in the year you sell it gets added to your overall AGI and can potentially put you in a higher tax bracket. That's your "penalty" for not having taken depreciation when you should have.
