My husbands parents gift deeded us a home with an effective date of Dec 31, 2011. We are now considering selling the house to move to a different city. My questions are: will I have to pay any taxes on the gifted amount? What is that amount based on? And is there a time frame on the penalty... for example if we live in the home for 2 yrs and then sell so we avoid the tax penalty.

Gift taxes are paid by the donor, not the recipient. You will have a cost basis of the value of the property at the time it was gifted. This will also be the amount they pay gift taxes on.

There if an exemption on capital gains tax on your primary residence. But there is a residency requirement to qualify.

Not quite right regarding the cost bais. The cost basis you use for tax reporting purposes depends on how the fair market value of the property compares to your parents' cost basis. If the FMV when you received the gift was high than your parents' cost basis, you use your parents' basis. If not, it gets a bit complicated, as the cost basis then depends on whether there is a gain or loss on the sale. Post back if this is the case and we'll provide more details.

Regarding the exemption if this was your primary home: since you took ownership less than two years ago you don't qualify.