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.