I think they probably did get advice before the deal and figured that Daddy would have to pay 25% on the depreciation recapture, but kids might be in a lower tax bracket for much of it, or might get away with ignoring it. I'm not certain that the depreciation recapture carries over from the gift-giver, but that question hasn't been asked yet. Had the place been refinanced? What are the rules on gifts of appreciated property with a mortgage? I know for charitable donations it can be an issue, but haven't come across it in a family situation.