Yes, I would report the improvement in the asset depreciation section in your rental property section and then report that you sold it for zero. Please read this Turbo Tax post for further information.
Rental property capital improvements in same year as sale
There is no restriction for placing capital improvements in existing rental property and then disposing of them in the same year. What will happen is that you will claim the first year's depreciation amount as an expense but will then this same depreciation amount will be reflected in the ordinary loss amount for the improvement. The expense and recapture essentially offset each other.
@PoconoRick
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