I am wondering how my dad can transfer his 50% interest in…

I know your question is important to you and I will be giving it the time and attention it deserves.

No the simple answer is that there is no way to save on taxes. When people transfer an asset that has appreciated in value they have to pay capital gains tax on it. There is no way around it because no matter whether someone is buying it or just receiving it as a gift there is a deemed disposition at fair market value.

Do you see what I mean?

Well tax is federal and so capital gains tax is federal and the one capital gains exemption is a principal residence.

Because your father is transferring half of the title then he would only have half of the capital gains to declare  and so 1/4 of that gain will go into his income for tax purposes in the year that he transfers title to you.

Exactly.

Well not really because what should have  happened then is that your grandfather should have paid capital gains tax so your father should just try to base it on what was fair market value when the property went into his name.

Yes. He would be able to subtract any legal or closing fees and he would also be able to subtract any capital improvements that he made to the property. He really needs an accountant to help

Well he still shit is his calculations on fair market value as of the day his they weren't on title and fair market value as of the date went off title

Well, not quite. If the cottage in total appreciated by $200,000 then your father's capital gain is $100,000 and only $50,000 goes into his income for tax purposes. It is 1/2 of your father's capital gain that is taxable.

So it's better than you thought!

I hope all this helps!

That will not work. The change of use would trigger capital gains tax again at fair market value.

I'm going to quote you to my kids!