Phagocytosis of apoptotic cells by both professional and semi‐professional phagocytes is required for resolution of organ damage and maintenance of immune tolerance. KIM‐1/TIM‐1 is a phosphatidylserine receptor that is expressed on epithelial cells and can transform the cells into phagocytes. Here, we demonstrate that KIM‐1 phosphorylation and association with p85 results in encapsulation of phagosomes by lipidated LC3 in multi‐membrane organelles. KIM‐1‐mediated phagocytosis is not associated with increased ROS production, and NOX inhibition does not block LC3 lipidation. Autophagy gene expression is required for efficient clearance of apoptotic cells and phagosome maturation. KIM‐1‐mediated phagocytosis leads to pro‐tolerogenic antigen presentation, which suppresses CD4 T‐cell proliferation and increases the percentage of regulatory T cells in an autophagy gene‐dependent manner. Taken together, these data reveal a novel mechanism of epithelial biology linking phagocytosis, autophagy and antigen presentation to regulation of the inflammatory response. Synopsis This study reveals how KIM‐1/TIM‐1‐mediated phagocytosis down‐modulates inflammation through ATG5 and ULK1‐dependent autophagic processing of phagocytosed material to MHC I and MHC II. Phagocytosis of apoptotic cells by KIM‐1, a non‐myeloid phagocytosis receptor, induces LC3 lipidation of resulting phagosomes. Autophagy protein expression, ATG5, ULK1 and Beclin1, are required for LC3 targeting to phagosomes and efficient phagosome acidification and maturation. KIM‐1 signaling via the PI3 kinase subunit p85 promotes LC3 lipidation and accumulation on phagosomes. Phagocytosed material processed through autophagy is presented to MHC I and MHC II. Enhanced antigen presentation resulting from autophagic processing results in a pro‐tolerogenic milieu, reducing the percentage of CD4 effector T cells while increasing the percentage of regulatory T cells. Phosphatidylserine receptor KIM‐1/TIM‐1‐mediated phagocytosis and autophagic processing of apoptotic cells promote antigen presentation in epithelial cells to modulate inflammation.