This is the thing- SOMEBODY claimed depreciation, whether you and your kids or just your kids, it makes no difference.
Depreciation would be taken on the total value of the rental. The rental was never 2/3 where each kid claimed 1/3, it was 100% rental, so it was depreciated on 100% of it's value.
So again, say the cost was 300,000. Depreciation would be based on 300,000 (there is an adjustment for the land, but let's keep it simple)
IF THE KIDS CLAIMED EVERYTHING, they each would claim half the deprecation. They would NOT just claim 1/3 each.
Ok, so if the depreciation was 90,000, the remaining value of the rental is now only 210,000 and your 1/3 share that you gifted would be 70,000, and the depreciation keeps going until the kids sell.
Again, if they sold the next day for 400,00, they would owe the same, each claim 45,000 depreciation recapture and 50,000 Capital Gain.
If you don't want to stick the kids with your share of the depreciation, you would need to sell to each kid half your portion at Fair Market Value. Then you could gift them that same amount in cash. YOU would then claim the depreciation attached to your portion as Ordinary Income.
So, let's say the property has a Fair Market Value of 400,000 and was depreciated 90,000, your portion has a Fair Market Value of 133,333. They each would buy your portion for 66,667 each. Your adjusted basis is 70,000 (100,000 - 30,000 depreciation) so you would claim 30,000 depreciation recapture as ordinary income and 33,333 as long-term capital gain.
The basis for each kid is now 166,667 (100,000 original plus 66,667 for your portion, and they each have 30,000 depreciation to recapture some day. You already captured the other 30,000 in depreciation.
If you went this route, it would be a chore to adjust for the rental in TurboTax.
Assuming the kids now each claim half (not just 1/3,) the kids would need to convert the rental and add it in as new or add the additional value (66,667 each) as a new asset naming it "Dad's portion" and depreciate over 27.5 years,
They would also need to adjust the depreciation when they sell to subtract the 30,000 you claimed.
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