Example 1
You bought the house for $100,000 in 2000. You sold it to your son in 2020 for $220,000. Over the years you claimed $50,000 in depreciation.
You have a tax reportable sale with a capital gain of $120,000 plus $50,000 in depreciation recapture ($170,000 total reportable income). This goes on your form 1040 Income Tax return
You effectively made a gift of equity to you son of $280,000 ($500,000 -$220,000) which needs to be reported on form 709 gift Tax return.
Your son’s cost basis is $220,000.
Example 2
Your give the house to your son outright. Your report a $500,000 gift on your gift tax return and nothing on your income tax return.
Your son’s cost basis is $100,000 (your original cost basis). But he also keeps track of the $50,000 depreciation (which transferred to him with the gift). When sells the house, the $50,000 depreciation recapture is taxed separately from the rest of the capital gain. That assumes he has a net gain. If the sale results in a loss (unlikely), he uses the $500,000 value as his basis
