I totally missed the part this is a rental property.

Yes, you will report the rental income and expenses as usual up to the date of sale.

The sale will be reported on F.4797.  Since it is a loss, it will be reported in Part I of F.4797 but disallowed under §267.  That loss won't flow to anywhere else on the return.

This means you can't use the Capital Gain (Loss) Transaction Worksheet.  Rather you should enter the disposition details on an Asset Entry Worksheet under Sch E.  Problem is, I don't see any option on that worksheet for related party transaction or otherwise to disallow the loss.  It looks like the only way to disallow this loss is to override Box 2(g) on F.4797 itself, which is not ideal.

Hopefully, someone more familiar with PS will come along and give you pointers on the input.