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I wanted to correct some information that someone posted here a month ago for anyone who might, as I did, stumble across the question thread.

UPDATED FOR 2018 Tax Year (filing in 2019)

• .As to the issue of Gifting only and the value of the Gift being $36,000, the apparent problem that the $36,000 is in excess of the joint exclusion amount of $30,000 could be avoided if the $36,000 were spread over two years.
  Per donor person to per recipient maximum excludable gift = $15,000. - for Tax Years 2018 & 2019
  Form 709 Gift Tax implications (not income tax!!!)

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As to the matter of Gifting a house, or for that matter any asset cash included, just to be clear, Form 709 is the filing submittal form for Gift Tax which is part of the combined and Estate Tax in the Federal taxation system, separate from Income Tax.  Specifically, since 2013 and continuing into 2018, any person can give any other person a gift, in part or in whole a total of $15,000 (2018) without incurring the need to file a Form 709.  Thus a married couple could give without any worry or need to file a total of $60,000 (2018) to a married couple, such as a daughter and son--in-law.  Separate from that is the point that if one gives more than the Exclusion Amount of $15,000 (2018) to another person in one year, the excess is considered part of the donor's Lifetime Gift exclusion amount. This is only relevant if the donor individually, in 2018, has an Estate at, above, or near $5.6 million [for 2018]. 

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NOTICE:  Following discussion uses the original financial numbers as it was answered in 2014.  

The problems that this question of a month ago raise are two part, separate from the whole discussion of the Gifting.

1. The parents formally rented the house, for payment received, to their son.  It would appear that in the approximate year from purchase the parents never actually resided in the house and instead it was for all practical purposes rented out over the ownership time period. Thus, it would be considered under the tax laws as an investment property.  Therefore they should have:  reported as income the rent, depreciated the value of the house according to the necessary schedule, deducted not only any real estate taxes but any other cost of maintenance that they paid as deductible against the rental income
   
   
2. As to the sale itself and recognition of Capital Gain, since it would seem clear that the house was never the parents' primary residence, the stated Fair Market Value ("FMV") of $225,000 does create a realized gain, and not just of the $36,000 but in fact more since the Basis in the house would have been reduced by one or more years of depreciation.  So the question arises, what might transpire?  If a Form 1099-S were to be filed by a broker, or attorney, handling the transfer of ownership, given that the house was not a primary residence, the marital gain exclusion of $500,000 does not apply.  It is possible that the IRS might inquire as to the necessary reported gain.  That might further raise the question of the rental.
   

So you see, all in all, this renting between family members can and may lead to many complications.