Data:

Client has been renting a house to her sister since 2004.  Adjusted basis is $30,000.  Client gifted the house to her sister on August 1, 2023.  Rental income and expense were reported for the 7 months on the tax return.  Form 709 is being filed as the FMV is above the annual exemption for gift tax purposes.

The house was actually "disposed of" during 2023.

The question is:

Is it proper to exclude the rental property from the return next year (2024)?  Would this cause the IRS problems (one year the property is there and the next year it is not -- no sales recorded in the year of disposition)?  Or is there a way to show it disposed of during 2023 that properly removes it from the reports (depreciation, etc.) that prevents the software from treating it as a sale with $0 sales price and creating a loss?