I understand the overall concept here. But when it comes to the specific options, if you record a sales price of zero on the depreciated sub-assets (property improvements, appliances etc), then it seems like those items would register a loss, and there would be no depreciation recapture tax on the depreciation previously claimed for those assets. There would be a higher gain on the primary property asset, but the depreciation recapture would be limited to the amount of depreciation that had been taken on the primary asset, so the end result would be more of the gain taxed at the 15% capital gains rate and less of it taxed at the 25% depreciation recapture rate.
On the other hand, if you allocate a percentage of the sales price to each item, whether you do it by allocating an amount equal to your current adjusted basis or a percentage of the property according to your cost percentage (two other options I've seen presented), then you would have to pay 25% tax on the amount equal to any depreciation you had previously taken on those sub-assets, and then 15% on any remaining amount. So the overall effect would be a (perhaps slightly) higher tax bill. Is this right?
If so, then obviously I would prefer to claim it according to the option with the lower tax bill, but I'm guessing the IRS would frown on that choice. Am I thinking about this and understanding it the right way?
