How is sale of personal residence taxed when it was used as rental 2003-2016 and as personal residence in 2.5 of last 5 years? How are suspended losses freed up on this?

It is taxed on the taxable gain.  

The depreciation that was taken will be taxed at ordinary income rates, up to 25%.

As for the rest of the gain, I assume you are asking about the $250,000/$500,000 exclusion.  First, it needs to be his Principal Residence for at least 2 out of the last 5 years.  However, if the taxpayer used it as his Principal Residence after it was rented, the rental period is "Nonqualified Use" (assuming he was not on qualified extended military duty).  That essentially means the exclusion is prorated.

Although the actual calculation uses days, I'll use full years for a simple example.  Let's say the taxpayer owned the property for exactly 10 years, and it was rented (not his Principal Residence, after 2008) for exactly 3 years.  In that scenario, 3/10ths of the time is "Nonqualified Use".  That means that 3/10th of the Gain does NOT qualify for the $250,000/$500,000 exclusion.

If you are using ProSeries, use the Home Sale worksheet.