confused about depreciation

[Roy Mitle]

For example: you buy a rental property for $100k.

$40k attributable to land and $60k to building.
You sell it 5 years later for $150k.
You'll need to take $2,182/year for depreciation (see MARCS 27.5y table), so that's $10,908 in 5 years.
Also, let's say you accumulated $5k in passive activity loss carryover. That may include depreciation, mortgage interest, repairs, etc accumulated over the years.

1. Figure out your cost basis. That'll be your improvements (none in this case) + initial cost ($100k) - depreciation (allowed or allowable, $10,908) = $89,092. If you forgot to take full depreciation, too bad, you have to subtract "allowable" depreciation here.

2. Your gain = sales price - cost basis = $150k - $89,092 = $60,908

3. You can reduce your gain by your passive activity losses, subject to some limitations: $60,908 - $5k = $56,908. This is what you pay tax on.

Now assume you were not able to write of the $10,908 because you were cash flow negative all these 5 years. In this case

1. Your cost basis = $89,902+$10,908 because $10,908 is carry forward loss.

Now say you never sell the property, then this accumulated depreciation starts to help you lower the taxes as and when you start becoming cash flow positive. so for instance in year 20 if you were supposed to pay tax, the carry forward loss due to accumulated depreciation from all these previous years will lower your taxes to zero.

Does the above seem generally correct? Or is it missing some important points or ordering? Is there a graph which illustrates this somewhere - something which shows that if you sell house in year 5 vs year 10 vs pass it on to heirs what happens to taxes.

Thanks so much