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This thread is fairly old, but I've seen this question come up a few times.
The basis of property must be reduced by the allowed or allowable amount of depreciation. IRC 1016.
However, if the taxpayer can show that the depreciation expenses were not taken, then the portion of the gain due to depreciation is taxed at the LTCG rate and NOT at the unrecaptured section 1250 rate (up to 25%). In addition, the portion of the gain that was due to allowable depreciation that was not deducted can be excluded from taxable income via IRC 121.
(3)Depreciation adjustments
The term “depreciation adjustments” means, in respect of any property, all adjustments attributable to periods after December 31, 1963, reflected in the adjusted basis of such property on account of deductions (whether in respect of the same or other property) allowed or allowable to the taxpayer or to any other person for exhaustion, wear and tear, obsolescence, or amortization (other than amortization under section 168 (as in effect before its repeal by the Tax Reform Act of 1976), 169, 185 (as in effect before its repeal by the Tax Reform Act of 1986), 188 (as in effect before its repeal by the Revenue Reconciliation Act of 1990), 190, or 193). For purposes of the preceding sentence, if the taxpayer can establish by adequate records or other sufficient evidence that the amount allowed as a deduction for any period was less than the amount allowable, the amount taken into account for such period shall be the amount allowed.
https://www.law.cornell.edu/uscode/text/26/1250
More explanation here:
https://bradfordtaxinstitute.com/Content/Claim-Depreciation-or-Not.aspx
