You should report the sale as the sale of a second home.
The sale price is the loan payoff amount. But you can't deduct a loss on the transaction, because it is personal. If you report it as a second home, the loss will not appear on your return.
The gift is the difference between the loan payoff amount and the appraised value.
You can report the gift either as from one of you, or you can split it and file two estate and gift returns.
To report the sale of a second home in TurboTax:
Type 'second home sale' into the search box
Then select 'Go to sold second home'
You will be asked 'Did or will you receive a 1099-B form or brokerage statement for these sales?' say no
You will be asked 'What type of investment did you sell?' select 'Second home'
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