It is well established by case law that legal title is not necessarily the controlling factor when other facts support that it does not have the full effect of economic incidents of ownership.

For gift tax purposes, it is held that the transferor's intention is the controlling factor.  In the absence of any paperwork, your client should be ready to prove that intention by some other means.  Re-titling of the property in November for no consideration, monetary or otherwise, could work in your client's favor.

This is not to say that there is a complete lack of gift with your client's arrangement.  For example, consistent with the position on gift tax, his son should only be a nominee recipient.  If the son got to retain the profit, that could constitute a gift.

Your client should be able to prove that he has been carrying the burden of ownership to protect his economic interest throughout these years - that may include financial outlays, administration, or at least some level of oversight of the activities carried out by the son, etc.

As explained by my friends, the basis for depreciation would be the lesser of FMV or adjusted basis when the property was placed in service.

For capital gain purposes, however, the cost basis would be $400k, adjusted for capital improvements and depreciation.