Sale of rental property

You would indicate that you gave it away.

First, you must determine your adjusted basis. 

Your adjusted basis is the cost, plus improvements, less depreciation.

(It does not matter if you took depreciation or not, the amount you took or could have taken needs to be "recaptured".)

So, say you paid 300,000 for the property. 25,000 was the value of the land (land does not depreciate) and 275,000 for the building. You had it as a rental for 5 years, that would be 50,000 worth of depreciation, so your adjusted basis is now 225,000 for the building and 25,000 for the land.

Say the Fair Market Value is 420,000. The land is now worth 30,000, and the building is worth 290,000. That is a 5,000 Capital gain on the land, AS WELL AS  50,000 Depreciation Recapture and 15,000 Capital gain on the building. 

You want to give it to your tenant. 

That would mean you are making a 420,000 gift (so you need to file a Gift Tax Return) and the tenant needs to claim the 50,000 depreciation recapture when they sell the property. 

Depreciation Recapture is tax as ordinary income (up to 25%)

In TurboTax, first enter your 2023 income and expenses for the rental.

Next, select edit for that property

Select Assets/Depreciation START

The building and land (as well as any other assets such as appliances) should be listed here

Select each assets from the list to clear them off your Schedule E

Be sure to select "The Item was sold, retired, stolen, destroyed, disposed of, converted to personal use, traded in or given away" on the "Tell Us More About This Rental Asset" screen 

Enter the depreciation or accept the amount of depreciation that the program computes and continue

Click the Learn More link on the "Special Handling Required?" screen next to "You gave this asset away as a gift" 

Read the "Gifts to Others" instructions, you need to tell the new owner the depreciation they will be responsible for.

Select "YES" to the "Special Handling Required?" screen

Continue and Done.