My sister inherited the house her husband owned, after his death 4 months ago. She lives in the same state but a different town. He had no will but she was listed as next of kin because they were legally married. There are no children. My sister wants to sell me the house as a "For Sale by Owner" with money being so tight I would not be able to get a loan for the amount she wants to sell it for. The house is free and clear. Would she have to pay capital gains on the house which was purchased 35 years ago and how would we determine the percentage of capital gains tax? I'd like to complete the sales transaction before the end of the year so I can move in by Christmas but she may not sell to me if the capital gains taxes are extremely high. Please help.

Thank you,
Kelley

Based on the facts you've described, it sounds like there will be a capital gains liability. The amount depends on several issues, such as her income, the selling price, appraised value, etc. A tax professional could probably give you more specific figures.

You REALLY need to take this to a local tax professional to be sure, but I believe that the sale can probably be exempted from ALL capital gain tax if they file a joint return. This is permitted in the year her husband died, which would be 2009 based on your post.

Your sister may have received a "stepped-up" basis in the property so that her tax cost equaled the fair market value of the house at the time of her husband's death. If this is correct, then there would likely be little or no gain on the sale.

IntlTax's point is valid and something I should have thought of.