Husband died

[BOB W]

Husband died and wife wants to sell house to daughter for "way less" than FMV.. ($900,000 for $500,000). What problems are there in doing so? (gift of equity)?

[Uncle Sam]

A gift tax return is required for the "way less" than FMV.
And - you need to advise the client that by gifting away part of the house's value, that gift does not reduce the otherwise "selling price" of the house.
I had a client who for 2022's return, gifted 1/2 the FMV away to his daughter and got paid for the other half thinking that it was going to reduce the selling price for the calculation of taxable profit
for the 121 exclusion. I told him 'Good bye'

[Rapid Robert]

For starters, upon death of husband I suspect half or all of the property received a basis adjustment to FMV, most likely reducing any taxable gain.

"that gift does not reduce the otherwise "selling price" of the house."

Really? A gift of part of the property in the hands of the donee has the donor's adjusted basis. It sounds like you are saying that if a co-owner sells their part of the house, they have to pay tax on the unrealized gain for the other co-owner? Doesn't sound correct.

[Uncle Sam]

The situation I was referring to was - my ex-client was gifted a house many years ago by his mother to him. GIft tax return was filed.
In 2022 he sold the house to his daughter and son-in-law. He gifted 1/2 the selling price and got paid for the other half.
He expected to use the reduced proceeds (due to the gift) as the selling price to determine the Section 121 gain.

I do agree that the poster didn't disclose in whose name(s) the house was titled to or how long the house was held (pre or post July 1977) when there was a distinction made of
each spouse's basis considerations.

[BOB W]

It's real simple: Husband died, house went into wife's name and now wife wants daughter to buy house for roughly half its MV. Wife has 2 years to sell to get $500,000 exclusion, which she qualifies. Probably no tax if done by dod in 2026