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Thinking on the fly, suppose I sell her half the house, which in the current market would give me a relatively small gain, way under the tax exclusion for profits on a sale. Then she's on the title as half owner and I use what she paid me to pay for half the addition and she pays the other half?

I want to thank you for a question without quotation marks. As in, "suppose I 'sell' her...." If she has the cash and inclination to do so it sounds on the surface OK to me. I would probably suggest that you get a professional appraisal so that it's well documented that she's paying FMV. As I recall there's no problem with using the exclusion with respect to only a partial sale, but you'd want that confirmed as well.


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