Yes, the following is correct. She was gifted half and inherited half. The gifted half is half of the aunt's adjusted basis at the time of the gift. "Was told by CA CPA that 1/2 the aunt's original price and 1/2 the FMV at D.O.D gets attributed to niece and niece gets only 50% step-up basis."
The scenario you present relates to two people who buy a house together even if one party contributes nothing to the cost. The niece was very clearly gifted property that she had no prior claim on.
