@MeeshkaDiane wrote:
Okay! Just to be clear, there is no capital gain until the house is sold to a third party?
That's not quite true. The whole house doesn't have to be sold. Any sale can produce a capital gain, including a sale of a partial interest. And I didn't say anything about a third party. (I'm not sure what "third party" means when there are already three parties involved.)
If the amount that Mary pays Peter is more than his basis for the share that he sells to her, Peter will have a capital gain. (If she pays less than his basis he has a capital loss, but he cannot deduct the loss because he sold to a related party.)
Thinking about this also made me realize that I was wrong earlier when I said that all gain would be long-term. The share that Peter sells to Mary is no longer inherited. Mary acquired that share by purchase. When she sells it, her holding period (long-term or short-term) for the share that she bought from Peter will depend on how long she has owned it after buying it from Peter.
This is obviously a complicated scenario. If you proceed with it, you should probably consult a local tax professional. The three of you each have to go to a different tax pro because your interests are not the same. It would be unethical for one tax pro to advise more than one of you.
