The gift to each child would be 1/2 your "ADJUSTED" basis in the property.
Your adjusted basis is your cost or Fair Market value when the rental was placed in service (whichever is less) plus any improvements less depreciation taken (or could/should have been taken).
(Your cost would be 1/3 the original cost or Fair Market value when the rental was placed in service (whichever was less)
So if you paid 300,000 TOTAL for the building and land, (100,000 cost for each) took 90,000 TOTAL in depreciation (30,000 each) your gift to each child would be 35,000 (100,000 - 30,000 = 70,000 / 2 = 35,000.
Each child would now have adjusted basis of 105,000 and prior depreciation taken in the amount of 45,000.
If they immediately sold for 400,000, they would each have 45,000 depreciation recapture (taxed as ordinary income) and 50,000 Long-Term Capital Gain
The kids each assumes the depreciation from your portion, therefore they will claim deprecation recapture for ALL depreciation on the rental. (Had they inherited your portion, their basis would be stepped-up to Fair Market Value and your portion of depreciation would not carry forward to them.)
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