In 2005, Dad and Daughter buy a three-unit residential rental property for $50,000 that needs repairs. It was a very large old home that was converted into three smallish apartments. Dad produces down payment, but both are on the loan and title to the house. They jointly act as landlords but Dad contributes the lion's share of the financial backing until Daughter establishes career. Later on, Daughter moves in one of the units and begins fully taking on the property, renting out the other 2 units while Dad is still on title.

Fast forward to today:

With repairs (despite market declines) property is worth $150,000 (this place was in ROUGH shape when they bought it).

Dad has agreed that if Daughter can qualify for a loan on her own, that if she can do a cash out refinance to reimburse him for the original down payment, plus $20,000, that he'll sign a quit-claim to put the property exclusively in her name and remove his, and relinquish his financial responsibility. She does qualify for a loan and can get enough cash-back to do this.

Before proceeding, they want to know how to address taxes. Is this a capital gain of $20,000 from the father's viewpoint, even though there is no actual "sale" taking place??

And, later on, if the daughter sells, and hasn't lived in it long enough (3 yrs of the last 5 if I remember right) to get the primary residence capital gains exemption, then, does she use the original $50,000 price as her basis, or some value calculated at the time her father went off title?

Without knowing the above, and without being an expert in your area, I don't see how the scenario can be spun as a sale "not" taking place. The mental gymnastics required would land on "I'm gifting you this interest in our joint property for no consideration, and then you are gifting me DP + $20,000, but the two have nothing to do with one another."

The biggest driver, though, is how they've been reporting this on their taxes to date: like one of them owns it or like a partnership, dividing it between the two of them.