If the Fair Market Value when you converted it to a rental was $55,000, and if you were not ABLE to take any depreciation (because it was first available for rent and then taken off the rental market within the same calendar year), you probably have a deductible loss of about $3000 ($55,000 minus $42,000). If you were ABLE to take depreciation, that needs to be factored in and will lower your loss (or create a gain).
Yes, you need to report it. If he owned half of the property, yes, he needs to report it as well. Each of you would claim half of the loss (about $1500 each)
To report it, you need to go through the Rental section and enter the "asset", and then indicate the asset was sold. I would probably recommend that you each report half of the amounts.
