The transfer of unclaimed depreciation to the land value does not apply here, because the property was not lost to casualty or fire, and business use of the property did not occur after the demolition/renovation. So you don't get to claim or deduct in any way, the depreciation that remained to be taken after you stopped using the property as a rental.
But your cost of renovation including the cost of demolition, (not the value of what was demolished) is added to the cost basis of the structure. You do not get a reduction in cost basis for what was demolished because it was not a loss due to casualty or fire. You destroyed it by your choice.
The cost/value of the land does not change for any reason.
All depreciation taken on the property during your period of ownership must be recaptured in the tax year you sell the property, and that recaptured depreciation will be taxed in the year of the sale.
If you qualify for the "2 of last 5" rule (and it appears you do not) then the recaptured depreciation is *not* included in that exemption. The recaptured depreciation is taxed no matter what.
