Depreciation and tax liability

[Carmen Ngai]

Hi Everyone, 

I am just starting out and looking for a rental property.  So, I have lots of questions, especially about depreciation.   I'd like to evaluate how it affects the tax consequence when I sell it some day.  From what I read, only the structure/building is depreciable. Land does not depreciate. It assumes in 27.5 years the structure is completely depreciated and worth $0. I ignore the closing cost and upgrade for simplicity sake at this point.  

Here are 2 hypothetical situations:

1.  Condo $500,000

If I buy a condo for $500,000, assume in 27.5 years I sell it for 2,000,000. 

Since only the structure itself can be depreciated.  For Condo, you don't own land.  So, from the accounting stand point, the condo after 27.5 years worth $0.  The cost basis will be $0.  

Realized gain will be $2,000,000

The part that is tied to the depreciation deduction is $500K the tax rate will be 25% (ordinary income tax rate).  $500,000 x 25% = $125,000

The rest of the gain will be taxed as long term capital gain, so, $1,500,000 x 20%, which is $300,000

Total tax due:  $425,000

2. Townhouse $500,000, sell in 27.5 years for $2,000,000.

Since the townhouse is sitting on a little piece of land, I assume a portion of the townhouse cost is land.  Lets assume the townhouse structure itself costs $200,000, $300,000 is the land.  After 27.5 years, the $200,000 structure is completely depreciated to $0.  The cost basis for this townhouse will be $300,000

Realized gain will be $2,000,000 - $300,000 = $1,700,000

Long term capital gain tax will be $1,700,00 x 20% = $340,000

Is my calculation correct?

The IRS said the whole “allowable depreciation amount” would be recaptured. What does “allowable depreciation amount” mean? Does it mean based on the accounting principals how much the property has depreciated? So, in the above case of the condo, then the allowable depreciation amount would be $500,000?  I understand IRS does not want taxes uncaptured when someone makes a profit.  Because of depreciation, a lot of the time the rental property by the book has a rental loss, which the landlord can use the rental loss allowance up to $25,000 to offset the regular income, so, it is kind of fair to recapture the income tax of that $500,000.  

But what if I am not eligible to use any capital loss allowance to offset my regular income, that means I couldn't take full advantage of depreciation, will the condo allowed depreciation amount still be $500,000?  

I imagine at the beginning with mortgage interest, depreciation...etc, from taxation stand point there would be a rental loss.  If I cannot use that to offset my regular income, can those losses be carried over to offset my gains in the later years?  
 

Any guidance is welcome! 

Thanks

Carmen