You buy a office building in 1972 for $30,000.00. You sell it in 2008 for $130,000.00. You pay capitol gains on $100.000.00 ($130.000.00 minus your investment). You do not pay gains on $130,000.00.
Now if you depreciated this property amoritized over 30 years you would be taxed on the $130,000.00, but keep in mind that you deducted the inital $100,000.00 investment over 30 years (from 1972 to 2002) so in essence that $100,000.00 investement was a pretax investment.
Now for confusing tax law, this depreciation does not amount to much each year as a deduction, only a few hundred dollars each year. But when you add it up over 30 years its $100,000.00. So without the cap on capitol gains, receiving these funds at the time of sale can push you into the highest tax brackets (if taxed as regular income).
It has been my experiance that depreciating property is not of any benifit. The tax law reads that at the time of sale you HAVE to recapture all depreciation that was allowed OR ALLOWABLE. So you recapture this depreciation weather you took it or not so you had better take it.
They used to let you do income averaging over 5 or 10 years but that was discontinued under Regan tax reform. That allowed you to average incomes over 10 years and pay the rate for the average. This worked well for those that have bust and boom years. Make $20,000.00 one year and $240,000.00 the next. Currently you really get hurt in that boom year. This helped eased the capitol gains burden before the Regan reforms. It actually worked quite well.
In other words it's too danged complicated!!!!
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