Out of the box, it is not possible to change the type of an existing work item. For example, in the CMMI template, you can't convert a Bug to a Change Request.

It seems to me that this could be a common scenario in many environments. The customer calls up and reports that the product is 'broken', and customer support opens a Bug work item. After further review, it is determined that the product is not broken, what the customer is really asking for is a Change Request, or enhancement.

While you cannot change the type of an existing work item, there are two options. In a work items query results page in Team Explorer, you can right-click on the work item, and choose from the following two options:

Create Copy of Work Item

Copies a work item that can be modified and saved under another name. This option is useful as a method of creating a work item from a 'template'. It is also handy for creating work items from a Scenario or Quality of Service requirement.

Add Related Work Item

Allows you to create and associate two or more work items. This option is useful when work items are not identical, but are similar. It creates a related link between the original and the copy.

Using this option, the hypothetical review mentioned above would take the original Bug work item and create a copy as a Change Request or Enhancement work item. The two work items are then linked together in the Links tab of the work item form. The original item can then be closed.