You don't mention what country this property is in. Or did I miss it maybe?
Q1. Does depreciation recapture put you in a higher tax bracket?
It could, as recaptured depreciation is added to your AGI in the tax year of recapture (Usually the year you sell the property)
which results in paying taxes according to the 22% bracket on ALL of their income
The above statement (standing alone as copied by me) is wrong. For how tax bracketing works, see https://www.irs.com/en/articles/2022-federal-income-tax-brackets-rates-standard-deductions and read at least half of it to ensure you're clear on how it works.
Q2. Can you use foreign tax credit on depreciation recapture?
The foreign tax credit is based on qualified foreign taxes paid, regardless of why those taxes were assessed by the foreign taxing authority. It's also possible the credit may not be "dollar for dollar", as it depends on a few factors, including the foreign country where the property is located and what type of agreement (if any) the IRS may have with the foreign taxing authority of that country.
Q3. Can you correct the cost basis at the time of sale if it was wrong on Form 4562?
If you change any existing value of any depreciated asset in the Assets/Depreciation section, that will completely skew the depreciation history, as well as the current year's depreciation taken. Rnetal property and it's associated assets are depreciated based on the "LOWER" of what you paid for it when originally purchased, plus the cost of any improvements prior to placing it in service, *or* it's FMV on the date it was placed in service. Whichever is lower. It is not common for the FMV on the date placed in service to be lower. Therefore, the original purchase price is most commonly used for depreciation.
Your cost basis in the property is what you paid for the property when you originally acquired it, plus the cost of any property improvements you paid for, over the entire time you owned it. If the cost basis of all listed assets do not add up to that, then you can't and don't report the sale in the SCH E section of the program. Instead, you report the sale in the "Sale of Business Property" section.
It now turned out that the actual cost basis was $350,000 (due to lack of documentation at the time of purchase) + $50,000 land value, so $400,000 total.
I think you're math is wrong. The $50K land value is already included in the $350K you mentioned. What may be misleading you is the way your cost basis on the property itself is entered/displayed in the Assets/Depreciation section. On that screen for the property asset, you have a box labeled COST and another box labeled COST OF LAND. Here's the breakdown.
COST: What you paid for the property in full. This includes the land.
COST OF LAND: the amount in the COST box that is allocated to the land.
With those two figures you provided above, the program (not you) does the math and subtracts the cost of land (50K in your case) from the cost, ($350K in your case) and the program (not you) assigns a value of $300K to the structure, and it's $300K that gets depreciated over time.
If you did not enter the correct figures, then you have a problem that is not simple to fix by any stretch. You need professional help yesterday, if not sooner. Especially if your state taxes personal income.
Is it wrong to continue using the same incorrect depreciation in the next 2 years for the ease of filing?
When you sell the property, you are required to recapture and pay tax on the *higher* amount of actual depreciation taken, or the depreciation you should have taken; whichever is higher. heck, even if you didn't taken any depreciation at all, you're still required to recapture what you should have taken and pay taxes on it.
