Legal Question in Real Estate Law in California

We California attorneys cannot tell you anything about Arkansas tax ramifications. I can tell you, however, that the negative tax ramifications at the federal level were locked in when she deeded the house to you and your sister in the first place. Had you inherited the house, you would only pay capital gains on the difference between the value in 2010 and now. By receiving the house as gift while your mother was alive, you will now have to pay capital gains taxes on the difference between what your mother paid for it and what you sell it for. If she owned the house for a long time, that may be a lot. Your sister also must now pay capital gains tax on the $40,000. You, however, can deduct that $40,000 from the taxable gains you have to pay tax on. Beyond that, this really is something for you to take up with a tax accountant who knows Arkansas state taxes or has connections with tax accountants in Arkansas.

Negative tax ramifications are always likely when a property is sold. This country (as well as many others) taxes profits made when property is sold. Since you apparently received half of the property as a gift in or about 2010, and paid $40,000 for the remaining half somewhat more recently, your "cost basis" for the property is presumably $40,000. If you can now sell it for a net after commissions, etc. of $85,000 (for example) your capital gain would be $45,000 (the selling price minus the cost basis), and I believe you are likely to have a 15% Federal tax rate on capital gains, so you'd pay $6,750 in Federal capital-gains tax. Possibly some state tax in addition. If you had inherited your half interest (by will or by trust), you'd have received a so-called "step-up" in cost basis to then-current market value, and your taxable gain and thus your tax bill would be much closer to zero. The lesson is, "Wait to inherit your parents' property - don't take it as a gift in anticipation of death!"