@tanlongpham , while agreeing with the good explanation provided by @KrisD15 , just would like clarify things a bit more on this depreciation and its effects:
(a) for a residential rental property ( no matter how acquired), you are allowed to "book" a depreciation amount based on the value of the depreciable portion of the asset over a period of 27.5 years. The value of the building and its contents each may have a different class life. The land underneath the house is not depreciable asset.
(b) Whether you recognize the allowable depreciation or not ( it generally lowers your tax on the rental income as negative amount ), the yearly and allowable depreciation accumulates --- this is called accumulated depreciation of the property.
(c) When you sell the property and come back to your books :
The gain/ Loss on the property is based on difference between Proceeds of the Sale and Adjusted Basis.
Adjusted Basis is the sum of Acquisition Price + plus Cost of Improvements over the years LESS Accumulated Depreciation. Thus Depreciation lowers your basis.
Proceeds of the Sale is Sales Price LESS Sales Expenses ( such a RealEstate Commission, Transfer Taxes , Sales Prep Expenses etc. ).
When you have a Gain, the part of the Gain that is Equal to Accumulated Depreciation is treated as Ordinary Gain -- normal tax rate ( marginal rate ). The rest of the Gain is given tax preferred treatment -- Capital Gain Tax rate --- anywhere between zero and 28%.
Does this explain your situation ?
Is there more I can do for you ?
