If you sell a personal residence of which part was used as a deductible home office you no longer have to pay tax on the percentage of the gain that represents the home office use (i.e. 10% of the property used as a deductible home office – 10% of the net gain on the sale of the property taxed). You can apply the $250,000 and $500,000 exclusion amounts to 100% of the gain, if you qualify, regardless of any business use.
However, according to IRS Publication 523 (Selling Your Home), “If you were entitled to take depreciation deductions because you used your home for business purposes…you cannot exclude the part of your gain equal to any depreciation allowed or allowable as a deduction for periods after May 6, 1997.”
But when determining the amount of depreciation to recapture you can forget all about the rule of “allowed or allowable”. You only need to recapture (i.e. claim as capital gain income) depreciation actually deducted (i.e. for which you received a tax benefit). Publication 523 states, “If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed.”