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@barb4 wrote:
The mother helped her daughter buy the home but the mother never lived there.

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How so?  Was that "help" a gift?

Was the daughter an equity owner?  What has she contributed towards the costs and upkeep of the home?

The daughter paid all costs the last two years and in the first two years she paid utilities.  The first two years the mother paid the mortgage payment and any upgrades to the townhome such as granite countertops and she paid fix up costs right before it sold. 

The mother did expect to be paid back for the upgrades and fix up costs when the townhome sold so not really a gift.  

Then with that line of thinking the mother would have to pay taxes on her 50% of ownership.  Correct?

You'll need to establish your facts a bit more clearly to determine the appropriate reporting position. 

• If I understand you correctly, the mother and daughter are both on the title, presumably, as joint tenants;
• While you clarified how some of the maintenance costs were paid, there's no mention of how the down payment was funded (and if any portion funded by the mother is to be recovered and how);
• It is interesting also that you mentioned that the mother expects the upgrade and fix-up expenses to be repaid that there's no word about the mortgage payments made in the initial two years; and
• There's no indication how the proceeds from the sale would be allocated between the mother and daughter.

Case laws would generally determine equitable ownership based on who take up the burdens and benefits of ownership, looking beyond whose names are on the title.  The burden of proof is on the taxpayer and this would entail not only documentary evidence (such as loan agreements and quitclaim deeds) but actual facts.

If it is to be argued that the daughter is the sole equity owner, you will need to construe a case based on these factors, which seem to be lacking based on the limited info you have shared, and discern whether there was ever any element of gifts in the equation.  There appears never to have been any formal agreement for the repayment of sums made by the mother in terms of the down payment and mortgage.  Even if there was, the question is whether those terms were enforceable and ever enforced.  Especially with the mother paying for the upgrade and fix-up expenses right before the sale, unless it is contended that what the mother had funded for down payment and mortgage was a gift to start with, it could further reinforce the presumption that these works were carried out at her expense (or fronted by her) to protect her interest and maximize the sales price of the home.

Thank you for your detailed response.  I will ask further questions.  I do believe the mother funded the down payment with the expectation of being paid back when the property sold.  All of her expenses were expected to be paid back from proceeds of sale.  There was no agreement signed as far as I know but just understood like most things in a family.

I recommend you simply do what you see = split this 50/50 for the tax return. Let them know what the tax hit is and remind them (if it applies) why one of them is in a higher tax bracket. Let them work out the issue of "making this fair between us." Stay out of this, otherwise.

Who deducted the mortgage interest in the first two years when the mother was paying it?  Were the property taxes paid from an escrow account, or directly by one of the owners?

"Substance over form," determined by "facts and circumstances."  But I wouldn't want to argue the mother's case for not paying tax on her half of the gain.  She could have deeded her interest to the daughter right after the place was bought.  She even could have deeded it at some reasonable time before the sale.  What this sounds like is a case of mother wanting to make sure she got paid back and knowing how far she could trust her own daughter.