Legal Question in Real Estate Law in California

Your father in law will need to file a gift tax return. Depending on his exemption amount available, he may or may not need to pay a gift tax.

The transfer to his daughters should not cause a property tax reassessment if a proper request for parent child exclusion ifs filed.

The sale by the sister to you will be a taxable event. She will have 1/2 of your father in laws basis in the property, and the excess over basis is likely to create taxable gain. This sale will not be exempt from reassessment, and the property taxes will be reassessed on this 50%.

Creative planning may be possible to improve the results. For example, if your father in law borrowed 50% of the value, and gave your sister in law cash as a gift, and transferred the home subject to a mortgage to your wife, you may get better tax results from an income tax and property tax prospective. You would need to deal with a lender who would waive the due on sale restrictions.

It would be worth your time and expense to get an effective estate planner to look at this (an your father in laws own estate and tax planning if he desires to do so).

Keep in mind, free legal answers are worth what you pay for them, since there is not enough information provided to advise you fully on these issues.

Mr. Christian has given you a good and pretty complete answer. I would add that if the father-in-law is elderly and/or in poor health, it might be more advantageous to pass the property later on, through his estate, as the heirs will receive a stepped-up tax basis value and hence would owe little or no capital gains upon a resale.

It is a REALLY bad idea for a person to give $1 million in real property away while alive. The tax disadvantages are enormous. Just for starters, your sister-in-law will pay up to $52,000 in unnecessary capital gains taxes in the scenario you outline. Your father in law REALLY needs to talk to a trust and estate planning attorney and come up with a better way to get the property transferred as he, you and the two sisters want/intend, without the big tax bills.