However, this doesn’t seem right to me because there is no taxable gain or depreciation recapture.

You can’t do repairs, you can’t stay there, any violations will be the same as a 100% taxable withdraw. 

Would depreciation on the equipment lower your taxable income, or do you already have tax losses to offset?

Yes, this strategy is an attempt to lower my wife’s taxable income.

This would allow you to keep the property in your portfolio and generate ongoing income.From a tax perspective, holding onto the property as a rental would let you take advantage of depreciation, which could reduce your taxable income.

Imagine making millions of dollars throughout your career and then having to pay Uncle Sam 30-50% every year instead of compounding that cash over time.This is exactly what real estate professionals have learned to mitigate.To reduce their taxable income, they buy a building every year, do a cost seg, and use depreciation to reduce their tax liability dramatically.Their personal wealth snowball grows much larger and much faster than their W2 counterparts who give most of their money back to the government each year.Following this strategy as a real estate professional is one of the best ways to end up with a much larger net worth at the end of your career.

To receive basis adjustment at death the asset must qualify as part of the decedent’s taxable estate and also qualify as either a bequest, a devise or pass by inheritance.

The vast majority of states also leverage figures on a federal return as a starting point to define taxable income, making adjustments to those figures to arrive at the portions of income that are taxable for state tax purposes. 

Also anyone have insight on excess taxable income regarding the above and private lenders?

@Yi Chu a Roth IRA is already an account that allows tax-free growth so depreciation won't benefit you since depreciation is used to offset taxable income.If you need the depreciation to offset other income outside of the investment, then it might be best to invest outside of the Roth IRA in order to take advantage of the depreciation.