Converting a rental property into a personal residence does not trigger immediate capital gains taxes or losses because no sale occurs. However, this change has notable tax consequences, especially regarding depreciation recapture and the potential tax effects when the property is later sold or gifted.
Transferring property as a gift, such as to a family member, has significant tax repercussions for the recipient, especially regarding their tax basis. Important tax factors to consider include potential gift tax obligations for the giver and capital gains liability for the recipient if they decide to sell the property later.
The recipient of a gifted property generally takes on the donor's adjusted basis. For example, if you bought the property for $200,000, your child's basis is also $200,000. If you made improvements that increased your adjusted basis to $250,000, that would be your child's starting basis.
The main immediate impact of converting the property is that you will lose the ability to claim tax deductions for expenses related to renting, such as mortgage interest, property taxes, maintenance costs, and depreciation. However, if you itemize your deductions, you can start claiming the personal portion of mortgage interest and property taxes instead.
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