That's correct. Gain to the extent of depreciation is potentially taxed at a higher rate than the rest of the gain.

After doing some further research, I don't believe it is correct that there should be capital gain tax on the basis after deducting depreciation - and also depreciation recapture.   What I can't figure out is how to enter the data so that the software calculates this correctly.   Any suggestions?

Research some more.

Gain = Sale price -expenses of sale-adjusted basis.

Adjusted basis = Cost + improvements - accumulated depreciation.

Gain to the extent of depreciation = unrecaptured 1250 gain. The rest of the gain = 1231 gain.

But that is not what the software is calculating.    The entire gain shows up on the K-1 as capital gain and then the amount of the depreciation also shows up as Unrecaptured Section 1250 gain.   How do I get the software to deduct that Sec. 1250 gain from the number for the capital gain?

The presentation is correct. It is saying here's your total gain, of which xxx is unrecaptured 1250 gain.

But how is the beneficiary supposed to report that on their return?   The instructions for the K-1 say that the number on line 4a which is the "net long term capital gain" is to be reported on Schedule D.   It says nothing about deducting from that number the amount on 4c which is the "Unrecaptured Section 1250 gain".  

After talking to support, I finally understand why the K-1 information is correct.   I wasn't taking into account the Schedule D worksheet which would reconcile these numbers.   This isn't something I've had to deal with before and I wanted to be sure I was giving the beneficiaries the correct information.  Thank you for your input.