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Yes, at least 2 ways. You need an accountant I think.
1. Gifted home. You owe capital gains tax on the difference (gain) between the selling price and your cost basis. Because this was a gift, your cost basis is your mother-in-law's original purchase price (even if it was very long ago) plus the cost of permanent improvements that were made to the property by you or your mother-in-law, such as a new roof, new floors, furnace, windows, etc. Note that you only count that cost of improvements that are still part of the property. If the roof was replaced twice, you only count the most recent replacement.
If you are audited, the IRS does not give you credit for any cost basis you can't prove, so you should make a diligent effort to find out how much she paid for the home, and how much she and you paid for improvements.
If the home was purchased a long time ago, you may owe a very large capital gain tax. This is one of the consequences of passing a house by gift instead of inheritance. However, if she gifted you the home and retained a life estate (she lived in the home until she died and even though you "owned" it, you couldn't sell it while she was alive) then the rules are different. Ask for more details.
If you and your spouse lived in the home as your main home for at least 2 years of the 5 years prior to selling it (and after it was gifted to you) then you can exclude the first $500,000 of gain from taxation. If you never lived there, you owe full capital gains tax.
2. Then if you are receiving installment payments, the interest is taxable but the principle is not. If you did not charge interest, you still owe income tax on the interest you would have been collecting if you had charged the IRS minimum interest rate (this is called imputed interest).
You may need an attorney to review the terms of the gift deed between you and your mother-in-law; you may need a real estate appraiser if your mother did retain a life estate, and you may need an accountant to help with the installment sale and capital gains. Turbotax can handle these transactions (Premier version or higher) but if the amount of gain is large, you may want to invest in a professional.
Yes, you will need to pay taxes on the gain from the home sale. You will enter this in the less common income section. You will enter it by doing the following
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