Basically when a deed is simply transferred to you by the owner, that is considered to be a gift. When you receive a gift, you retain the same basis as the donor's basis. So your basis in this house will the the same as what your mother-in-law
's basis was at the time she gave you the home. It is not the market value of the home at the time you receive the gift.
Your mother-in-law's basis would have been whatever she originally paid for the home plus the cost of any improvements she may have made. That basis is what transferred to you. If you have also since made improvements of your own to the home, then you would also add the cost of those improvements to your basis.
If you now sell the house your gain is determined by taking the selling price less that basis, less the cost of any selling expenses such as real estate commissions. If you have a gain, that gain is subject to long term capital gains tax which is currently capped at 15%. If you have a loss, then no tax wil be due.
In either case, the transaction
should be reported on Schedule D of your tax return.
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