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MIL can sell it with no capital gains. Is this correct?

Technically no, as explained by AJ and others upthread. But I have a somewhat different opinion. Just make sure she DOES NOT SELL IT BEFORE HE DIES, or the taxes will be owed on the original basis. His “half” steps up only upon death.

Using simple numbers, the house started at $0 and is now worth $1,000,000. Upon his death she inherits his $500,000 “worth” of house at the stepped up value. So the “basis” is now her $500,000 which she can sell and claim a $250,000 exclusion. (She doesn’t get the full $500,000 exclusion because she is now just one owner, not the couple.) She will pay tax on the $250,000, or about $50,000 at 20% cap gains.

If she sells now the cap gains is on the full $1,000,000, except there’s a $500,000 exclusion (because they are both alive), meaning she will pay on $500,000, or $100,000 at 20% cap gains.

This may be completely wrong, and if so I’m sure someone will jump in and correct me.
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