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First let me break down the sell of your home rules.
If you lived in the house for 2 of the last 5 years prior to the sell, you can exclude gain up to $250k if single and $500k if married filing joint.
Your gain would be the difference in cost plus improvements and the sell less expenses to sell.
Assuming your gain is $40,000 ($125k - 85K) and you lived in the house for the time needed you would not have tax to pay on the gain but you would need to pay tax on the DEPRECIATION RECAPTURE. This is the amount of depreciation you claimed while using for rental. You cannot exclude that amount.
If you did not meet the 2 year time needed to exclude then you have a $40,000 gain on a rental property and that is taxable.
This is all reported on Schedule D and Form 4797 when you file. Capital gains tax rates would apply at long term holding rates. These are based on your total income for the year.
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