Capital Gains
My parents owned a joint rental property for many years. My dad recently passed away and my mom is in the processing of selling the property. She will make a profit of about $50K. She is on a fixed income, is it possible to avoid some or part of the capital gains tax? Also, are there any other taxes that she should expect to pay? 
no, but if they held the property more than a year, they will pay long term capital gains - not short term.
If your parents jointly owned the property, then your father's half of the property passes to your mother at its stepped up basis.
For federal estate tax purposes, you may want to have the property appraised anyway. Let's say that your parents originally paid $50K for the property and now the appraisal comes in at $100K. Your mother's cost basis in her half of the property is $25K, while your father's stepped up basis in his half of the property is now $50K -- making your mother's new basis in the property $75K.
Now (in this example), her potential taxable capital gain is $25K at either a 5% or 15% rate depending upon your parent's tax bracket. Depreciation recapture is still in effect. Depreciation taken during the holding period (or depreciation that should have been taken, whichever is greater) is recaptured at a 25% tax rate.
The tax is paid only if the property is sold, and selling expenses are also added to the basis to reduce the taxable profit.
To avoid taxes, don't sell this property. Instead, have your mother sell her current primary residence. Assuming your parents owned AND occupied their current residence for at least two years, the profit (up to $500K) on the sale of the property is tax free this year. If your mother waits until next year to sell, then only the first $250K is tax free.
Now have your mother move into the rental property and establish that as her primary residence. If your mother is willing and able to do this, she still gets lump sum cash from the property sale, except this is tax free.[ Edited by DaveT on Date 07/16/2003 ]
What if the property was my father's primary residence before he passed away?
I am assuming that you really meant that only your father was on title, but that both your parents lived in the property as their primary residence.
Only one spouse needs to be on title, but your mother needs to file a joint tax return to claim the capital gains exemption. The only opportunity for her to do that will be the return for the tax year your father died.
If he died this year and she sells the house this year, then the 2003 tax return your mother files in April can be a joint return and she can claim the capital gain exclusion on the sale of a primary residence. If she waits until 2004 to sell the property, she will not have had the requisite ownership to meet the two year rule.
If you really meant that only your father owned and occupied the property as his primary residence (your parents are separated and lived apart), then this can still work if your mother files a joint tax return. Otherwise, your father's estate claims the capital gains exclusion on the sale of his former primary residence when it files his final tax return.[ Edited by DaveT on Date 07/16/2003 ]
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[addsig]
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DaveT
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....as always,
GoodInvesting, Rocky