I bought a rental house in 2016 and got special depreciation of 34K and regular depreciation of 9K for 2017. On my Schedule E, when adding the 43K to other expenses and subtracting from rents, I incurred a 70K loss. But Turbo Tax (Or the IRS I guess) limited my loss to 12K. I am now selling the property in 2018 and I am required to claim that 43K of depreciation on CA form 593-E. How can CA make me claim 43K of depreciation when I was limited last year to only 12K of losses (I.E., a lot of the 43K of depreciation wasn't counted.) PLUS I was not allowed to carry the difference forward?
First off, check to be sure you don't have a Passive Loss Carryover or a Net Operating Loss carryover from last year. Generally when you have more losses than you can claim, the excess loss is carried over to future years (or carried back, in the case of an NOL). If you don't have income to offset the loss before you sell the property, all passive losses are released and available in the year of the sale.
This is the reason why you may be required to claim the full depreciation amount on the State form. In theory, you will claim that expense in the future.
Since the accumulated depreciation on the property increased last year, even though you couldn't deduct the full expense, the actual depreciation decreased your basis in the property. And since you didn't keep the property for its full useful life, you are required to recapture the depreciation that accrued.
IRS rules state that you must recapture the depreciation, even if you didn't take it, and most states follow IRS rules.
Unfortunately, there is no way to avoid depreciation recapture.