My son is going to receive money from a house I donated to him in Mexico in 1998. The house is to be sold and he will receive the full payment of the sale.
He then plans to transfer the money to me in the U.S.j He and I are American Citizens. How will the money payment to him by international wire and his further transfer of the money to me, affect our taxes?

1. When you say you "donated" the house to your son in 1998 I assume you mean you made a gift of it to him - you transferred the title to him, correct? If so, then back in 1998 you should have filed a gift tax return, assuming the fair market value (FMV) of the property was greater than the annual exclusion amount from gift taxes. Back in 1998 I think the annual gift exclusion amount was $10K, but it may have been slightly higher.

2. Now that he has sold it, he may owe capital gains on the profit he realized, if any. He does not need to report the gain if the house was his principal residence for at least 2 of the last 5 years and the amount of gain is less than $250K ($500K if he files as Married Filing Jointly). To calculate the gain he needs to know his cost basis in the property. Now it gets a little tricky. Usually the cost basis of gifted property is equal to the gifter's original cost basis, but there are exceptions if the amount he sells it for is less than that or is less than the FMV as of the date of the gift (1998). Assuming the house has actually appreciated in value since 1998 - his basis is equal to your original basis (what you originally paid for the house) plus the costs of all capital improvements that either you or he made to the property over the years.

If he doesn't qualify for the $250K exclusion the he must report the sale and gain on Schedule D of his 1040.

If he has to pay taxes on the sale to Mexico he can either deduct foreign taxes paid from his US tax return or take a credit for foreign taxes on form 1116.

3. When he transfers the proceeds to you, I assume that means the money is yours and so he is making a gift to you. As the receiver of this gift you have no tax implications, and there are no taxes on international monety transfers. But if the amount is greater than $13K he must file a gift tax return. He will not actually owe any taxes on this gift unless the total of all gifts he's ever made that are in excess of the annual exclusion exceeds $2M. And if this is the case I sincerely hope he has a professional helping with his tax return!