I think you have two different issues here.

First, if the gain on the sale of your PRIMARY residence is less than $500,000 (married filing jointly) and you have lived in that residence for at least two out of the last five years, the gain is not taxable. Note that you can only do this once every five years. Since this is not YOUR primary residence, then I believe that you will have to pay tax on 2/3rds of the gain. The other 1/3rd of the gain would appear to be your daughter's gain, and since the condo is HER PRIMARY residence, it may be possible to avoid tax on her gain, even if she didn't live there two years (it depends on the facts surrounding why she had to sell before the two years were up).

The second issue has to do with how you are paid for the condo. If you receive payments in more than one year, you have an Installment Sale. In this case, the gain would become taxable each year based on the proportion of money you receive that year compared to the total sales price. The buyer should sign a note, with a reasonable interest rate paid to you.

One final issue that may need to be addressed is whether or not your daughter depreciated (or should have depreciated) the condo in connection with her music lesson business.

It is really too complicated to completely explain this in an email, so I recommend that you contact an MDTax member in your area for assistance in analyzing this transaction.

Good luck!

Gary

Zip Code: garyd@davisandbrandel.com