Your Dec. 1 column described how someone should calculate his taxable gain when he sold a house from his revocable trust. I have a friend who thinks if she inherits her father's house through his will — not through a trust — she won't owe any taxes when she sells it. She says that she'll inherit it at its current market value and that it won't be subject to the capital gains calculation you wrote about. But her dad has owned the house for many years, so I think there could potentially be a large capital gain. Is she right?

She's right. The key difference is that she'll be selling a house she inherited. My earlier column discussed a house being sold by its original owner.

Let's say you bought your house for \$200,000, invested \$40,000 in capital improvements, and later transferred it to your revocable trust. You ultimately sold the house for \$800,000, incurring \$15,000 in expenses. Your profit is \$785,000 (sale price net of expenses) minus \$240,000 (original cost plus capital improvements. In other words: \$785,000 minus \$240,000 equals \$545,000. The value of the house when you transferred it to the trust is irrelevant. (A potentially misleading example in my earlier column didn't make that clear.)

But let's say instead of selling it, you leave it to your daughter. When she inherits it — regardless of whether she inherits through your will or from your revocable trust — she'll receive it at its market value at the time of your death. If the house is then worth \$2 million, she can sell it for \$2 million without incurring any tax. If she sells it for \$2.2 million, she'll owe taxes only on the \$200,000 increase in its value since your death.