Land Contracts and Depreciation

[Richard Patrie]

Wondering if any CPAs out here can chime in.

I'm in the midst of selling a few of my SF houses to my tenants on a land contract.

For the past couple years I have been taking depreciation while they were rented.

After the contract is signed, I will still hold the title. Can I continue to depreciate the property until the final payment is made and the deed is transferred? If so, I would think that I'd be taxed on the total sale price less the cost basis, less depreciation taken. 

So in this example, I buy a house for 100K. Rent it for 2 years and sell it on a 10 yr land contract for 140K. 12 years of depreciation would be $43,632. Once the deed is transferred, the net proceeds would be 140K - (100K-$43,632) = $83,632. Of this, 43,632 would be taxed as recaptured depreciation, and the remaining $40,000 would be taxed as long-term capital gain. (I would count any interest received as normal income)

Or is this completely wrong and the IRS considers this an installment sale, regardless if I retain title, and tax me each year and not allow depreciation. 140K - $100K = 40K/12 yrs = $3,333 per yr in taxable income over 12 yrs.

I figured that this is something that has been seen before on BP. 

Thanks!