It turns out that Home Sale Worksheet Part IV - Exclusion and Taxable Gain. Lines 29B and 30 are NOT the correct places to add the Home Office depreciation to the Rental depreciation. Doing so will cause the Home Office depreciation recapture that you add to be taxed at your long term capital gains rate (in my case 15%), which is not correct. It should be taxed at your marginal tax rate to a max of 25%.
The solution I found is to modify the value on Form 4797 Sale of Business Property, Ln 22 to be the sum of the Rental depreciation and the Home Office depreciation. It must be overridden for this to work. Now the entire recapture (gain) is taxed properly.
For the State of California, the value must be similarly modified on Sch D-1 p2 Sale of Business Property, Ln 25. Override this value for it to work.
This solution still does not enter correct numbers for purposes of calculating AMT. In my case it made no difference, but your mileage may vary.
I don't yet know if TurboTax will allow me to e-File with overridden values in these forms. All of this took me hours of research to figure out. TurboTax needs to find a real solution to this fiasco. This is not the quality that I expect from a product labeled "Home and Business".
