GIFT TAX and Capital Gain Tax

I am buying my moms house. It is appraised at $400K, she is selling it to me for $200K. The contract says the selling price is $400K, but that she is gifting me $200K so I can use that as equity. I know it does not hurt her with the Gift Tax since there is an exclusion of $675K. But, will she be hurt with the Capital Gains tax? The basis of the house is about $50K, purchased in 1965. Is the net gain calculated on the $400K, or the $200K since she is gifting me the $200K? And what form, other than the 709 do I have to fill out if any? Please help!

First of all, you are correct in treating $200K as a gift because the rule is that if there is a sale for less than market value, the excess of market value over sales price is a gift.

The capital gain is based on the amount realized from the sale, which is $200,000, because that is actual amount you are paying and the amount she is to receive. However, you may run into a problem with the IRS over this because the contract states a sales price of $400K. The IRS might take the position that the sale was for $400,000 and that the sale was made and then the next instant, you mother made the gift. If that is the case, the gain would be calculated on the $400,000. I don’t think that would be likely but it is a possibility, and I think you should either change the contract to show a sales price of $200,000, or hire a CPA or tax attorney to advise you on the trasaction.