Depreciation: when do I get credit for initial purchase?

[Cameron Price]

I've Learned a ton about accounting lately, but I just can't seem to figure out depreciation.

I bought a rental property for $25,000 in 2012. I was paying back $500/ month at 4% interest to a private investor. I sold the property earlier this year for $38,000.

When I was working on my taxes for 2012 I learned that I couldn't deduct the principle amount for the loan, only the interest portion. I fully understand that now, but didn't at the time. 

What I haven't ever figured out is the depreciation process for the initial $25,000. I understand that I'm required to spread that cost out over 27.5 years. So, as I understand it, I get a deduction of $909/ year  ($25,000/ 27.5 years). I sold the house this year for $38,000. SO, I have deducted $909 for approximately 3 years. Total depreciation of $2,727 (909/ year x 3 years). What happens to the other $22,273? (25000 initial - total depreciation of 2727)... when do I account for that?

Also, I have read that depreciation accounts for the wear and tear of a property... It wears out over time in theory.

I've also read that depreciation is accounting for the initial cost, spread out over 27.5 years, instead of an expense all deducted in one year. 

Which one is it, or am I missing something? 

Most people explain that depreciation is an awesome tax benefit. I feel like I got shafted on my taxes for 2012. I was charging $700/ month for rent, paying $500/ month for the loan, and $100/ month for insurance and property taxes. I put $100/ month in my pocket and handed out the other $600, but was taxed on $700/ month income. I got deductions for property taxes, insurance, and interest paid as well as 1/12th of the $909 depreciation. All told, I profited $100/ month, and owed taxes on approximately $400/ month. I paid more in taxes that I made. How is this a good thing for taxes in the short term?