Many have the false belief that depreciation is a permanent deduction. It is not. When you sell or otherwise dispose of the property, all prior depreciation must be recaptured in the year of the sale. Then you pay taxes on that recaptured depreciation in the year of the sale. That recaptured depreciation does two things.
1) It's included in your AGI in the year of sale and;
2) It has the potential to bump you into the next higher tax bracket.
There is one rule though that pertains to 2nd item. Recaptured depreciation taxation is capped at a maximum of 25%. So if you're already in the 26% tax bracket, you'll only be taxed at 25% on the depreciation recapture.
Whereas if you're in the 12% tax bracket and the recaptured depreciation puts you in the 22% tax bracket, the amount of your taxable income that exceeds the 12% cap of $40, 25 (for single filers) of your taxable income will be taxed at 22%.
Now that's and "extremely" rough statement. There's all kinds of rules that would require me to write a novel to take them all into account. But I think you get the idea.
