Trying to determine tax implications for the sale of home as gift

Your issues are as follows:

1) You'll need to calculate the adjusted basis in the property.

2) To get any exclusion, it needs to be a personal residence for 2 years. (EDIT: there are a few exceptions).

3) Any gain due to the depreciation deductions is taxed as unrecaptured Sec 1250 gain, at a max rate of 25 percent. (But this is only for depreciation deductions taken after May 1997).

4) The rest of the gain (i.e. the amount the selling price is above the original cost basis) needs to be split into periods of qualified and nonqualified use. Nonqualified use is the time from Jan 1 2009 to the time the property is converted to personal use, and qualified use is the time it was a personal residence. You allocate the gain based on relative time. The gain allocated to qualified duse, you can use the exclusion on. The gain allocated to nonqualified use, is taxed as a long term cap gain.

If there is anything more complicated than this (i.e. a 1031 exchange was involved, etc) - then refer him to a CPA.

Not sure if Pub 17 will help you or not. Here are a couple of quotes from it:

quote:

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Losses on sales or trades of property. You cannot deduct a loss on the sale or trade of property, other than a distribution in complete liquidation of a corporation, if the transaction is directly or indirectly between you and the following related parties.
Members of your family. This includes only your brothers and sisters, half-brothers and half-sisters, spouse, ancestors (parents, grandparents, etc.), and lineal descendants (children, grandchildren, etc.).

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quote:

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Property received from a related party. If you sell or trade at a gain property you acquired from a related party, you recognize the gain only to the extent it is more than the loss previously disallowed to the related party. This rule applies only if you are the original transferee and you acquired the property by purchase or exchange. This rule does not apply if the related party's loss was disallowed because of the wash sale rules described in chapter 4 of Publication 550 under Wash Sales.
If you sell or trade at a loss property you acquired from a related party, you cannot recognize the loss that was not allowed to the related party.
Example 1.

Your brother sells you stock for $7,600. His cost basis is $10,000. Your brother cannot deduct the loss of $2,400. Later, you sell the same stock to an unrelated party for $10,500, realizing a gain of $2,900. Your reportable gain is $500 (the $2,900 gain minus the $2,400 loss not allowed to your brother).

Example 2.

If, in Example 1, you sold the stock for $6,900 instead of $10,500, your recognized loss is only $700 (your $7,600 basis minus $6,900). You cannot deduct the loss that was not allowed to your brother.

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Sounds like the parents' basis carries over to the kid. Where it gets tricky is, when the kid sells the house, do depreciation recapture rules come into place?

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It's partlya gift and part sale, so is this a taxable gain or not?

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Related party issues are pretty complicated and fact-specific. You probably need to have a sit down with a CPA where you can discuss all the facts and relevant case law and regs. You essentially have a related party loss of partial business and partial personal property. There are answers, but they are not easy as they involve multiple parts of the tax code that don't always play nice with each other.

Sorry I could not be of more help, but this is really something you need to sit down with someone.