Gifting a rental propery

[speierpm]

I gifted a rental property to the tenant in March 2025.  She was paying rent prior and I was depreciating new siding.  I do intend to file a Form 709.  I assume Intuit turbotax will only offer me a house sale option and not a house gifting option, but this was not a sale.  Please advise as to how to proceed.  Many Thanks

[FranklinF]

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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[M-MTax · Accepted solution]

Most all of what @FranklinF posted is accurate but you do not have to be concerned with the vast majority of it since you gifted the property and did not sell it to your tenant.

Rather, you only need to tell TurboTax that you converted the property to personal use (or gifted it if the program asks) and then file a 709 with the IRS (note that TurboTax does not support Form 709).

Your tenant will take your adjusted basis or the basis will be the fair market value on the date of the gift, whichever is lower. You should provide your tenant with your basis information which would include the purchase price, cost of improvements made, and accumulated depreciation deductions.