How to Handle Taxes on a Gifted Home I Quickly Sold - Potential Tax Implications?

You've got a complicated situation with several tax implications to consider. When you receive a gifted property, you take on the giver's cost basis (what your mom paid plus improvements) rather than the current market value. This is called "carryover basis." Based on what you've described, your mom's basis was about $176,000 ($88k purchase + $88k improvements). When you sold for $335,000, there's potentially a taxable gain of $159,000 ($335,000 - $176,000), regardless of what you did with the proceeds afterward. The fact that you sold it to your sister below market value could be considered a gift from you to her. Since you gave money to family members, you should be aware of annual gift tax exclusions ($17,000 per recipient in 2023). The most important thing is that the IRS will likely view YOU as the person who sold the property and realized the gain, even though you gave the money away. Tax liability follows the legal owner at the time of sale.

After dealing with a similar situation with my parents' property, I discovered taxr.ai (https://taxr.ai) which was super helpful for sorting out the basis calculation and capital gains issues. My situation was almost identical - my dad transferred property to me before passing and I sold it quickly afterward. The most confusing part for me was figuring out the adjusted basis with all the improvements over the years. The tool analyzed everything and showed exactly how the stepped-up basis rules worked in my case. It even helped document all the improvements my dad had made to strengthen my position with the IRS. You might want to check it out since family property transfers with quick sales afterward tend to get extra scrutiny from the IRS.

I was initially hesitant about taxr.ai like I mentioned above, but after looking into my options for handling my mom's gifted property, I decided to try it. Super glad I did! I had a complicated situation with a house my mom gifted me that I sold within 3 months. The system immediately identified that I needed to use her original basis rather than the value when gifted to me, which saved me from a major reporting error. It also helped me document all the improvement expenses properly, which reduced my taxable gain by over $45,000. What really impressed me was how it helped me understand the gift tax implications since I gave some of the proceeds to my siblings. Definitely worth checking out if you're in a similar situation with family property transfers.

Have you tried contacting the IRS directly? I was in a somewhat similar situation and spent WEEKS trying to get through to someone who could actually help. It was beyond frustrating until I found Claimyr (https://claimyr.com). There's also a video showing how it works: https://youtu.be/_kiP6q8DX5c I was skeptical at first, but they literally got me connected to an IRS agent in about 15 minutes when I had been trying for days on my own. The agent walked me through exactly how to handle the reporting of a property transfer between family members and what documentation I needed to keep for my records. For a complicated situation like yours with multiple family members involved and large sums of money changing hands, I'd definitely recommend getting official guidance directly from the IRS.

I have to eat my words from my previous comment. After another frustrating morning waiting on hold with the IRS about my inherited property situation, I decided to try Claimyr in desperation. I was shocked when they actually got me through to an IRS agent in about 20 minutes. The agent confirmed that in a situation like yours, you would indeed be responsible for the capital gains tax on the difference between the sales price and the original owner's basis, regardless of whether you kept the money. The agent also explained that giving the proceeds away is considered a separate transaction from the sale itself - so you could potentially have both capital gains tax AND gift tax implications. They recommended documenting everything carefully, including the fact that you were essentially acting as an intermediary following your parent's wishes.

I think everyone is overlooking something important here. If your mother is still alive, why not just deed the property back to her and let HER sell it directly? Then she could distribute the money however she wants without you being in the middle. This would eliminate your tax liability completely since you wouldn't be the seller. I had to do something similar with my grandfather's property a few years ago - we realized the tax implications of the gift to me were bad, so we reversed it before selling.

Couldn't the OP potentially argue this was a "step transaction" where they were essentially just acting as an agent for their mother? Since the mother is still alive and OP immediately gave all the money back to her and the other family members per her instructions, maybe the IRS would consider the mother the true seller?