You do need to add the basis of the rental property in TurboTax if not already there, and then report the sale of it. You will take the sale proceeds and allocate them to the assets sold, which includes the real estate, improvements, land and furniture and fixtures. Typically, you assume the sales proceeds are equal to the cost basis of all of the assets accept for the house itself unless there is an agreement with the buyer that states otherwise. When you are done, you will typically have a gain and the portion of the gain that is equal to depreciation taken over the years will be taxed as ordinary income up to a maximum of 25% federal tax, and the rest of the gain will be taxed at capital gain rates.
Also, you need to consider depreciation in the cost basis of the property excluding the land. The IRS requires you to reduce the original cost basis by the applicable depreciation to arrive at the adjusted cost basis for calculating gain or loss on sale. It doesn't matter if you didn't deduct the depreciation, you must include it in the basis calculation. If you were entitled to depreciation but didn't deduct it over the years, you can make an adjustment for that in the year of sale and deduct it.
You have two choices in determining how you can claim depreciation that you failed to report in previous years. You can file an amended return for the effected years if allowed (you can only go back three years for this) or you can file IRS Form 3115 that will allow you to apply for a change in accounting method. If you file form 3115, you can report the missed depreciation in the current tax year.
If you decide to file Form 3115, be mindful that you can’t use this method for making a late section 179 expensing election, or to change the date an asset was placed into service, or to change the designated use of an asset.
On form 3115, you need to complete the entries on page 8 "Schedule E - Change in Depreciation or Amortization". In part I(a), the DNC code is "7", used to note a change in depreciation method from an impermissible method. You will need to complete the "Information for All Requests" on pages 1 to 3.
You can only prepare Form 3115 in the desktop version of TurboTax. You can find the form by entering the form number in the "Open Forms" box you will find in the Forms Menu. Here is a link to an article that you may find helpful: Reclaim depreciation missed in previous years .
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