Taxpayer owns and resides in Home for 7 years, which he purchased for $550,000. During the period of ownership, Taxpayer rented out a portion of the home and took depreciation deductions of $20,000. Taxpayer then sells the property for $750,000. What are the tax consequences to Taxpayer upon sale? 

 Taxpayer has no gross income because the property was the principal residence and the gain is less than $250,000. 

Taxpayer has gross income of $20,000 attributable to prior depreciation deductions. 

 Taxpayer has gross income of $200,000, the difference between the sales proceeds and the original cost basis. 

Taxpayer has gross income of $220,000, the difference between the sales proceeds and the adjusted basis