“I inherited a house, sold it & put the money into another house for my daughter to rent from me.”----> REMEMEBER: as long as you allowed a family member, your daughter, to stay in the property without charging her ( or charging rent lower than fair market rental value) rent, the IRS considers the free rent a gift for your daughter. However, for 2010 and 2011, UNLESS the yearly rental value is MORE than $13,000, you do NOT need to file the IRS Form 709;due to annual gift exclusion that is annually exempted from federal gift taxes;What I mean is that while the IRS hasn't been auditing heavily for this, the rent would need to be more than $13,000 a year for 2010 and 2011 to create a gift tax issue. Free rent for her is a gift of something for value. Gifts don't have to be cash.
“ My daughter has lived there for 16 years and is now ready to purchase her own home. I don't want to keep the house as a rental so, I would like to sell it & split the money up. A small amount for myself & the rest split between my 2 daughters for them to use toward their house/home purchase. Can this be done & how would capitol gains taxes be applied?”----->I guess it depends; you can exclude up to $250,000 in profit from the sale of a main home (or $500,000 for a married couple(if you file your return as MFJ)) as long as you have owned the home and lived in the home for a minimum of two years. Those two years do not need to be consecutive. In the 5 years prior to the sale of the house, you need to have LIVED in the house for at least 24 months in that 5-year period. In other words, the home must have been your principal residence. You can use this 2-out-of-5 year rule to exclude your profits each time you sell or exchange your main home. Generally, you can claim the exclusion only once every two years. Some exceptions do apply.
“I had thought about just rolling the money over into the purchase of my daughters home (should I put my name on the deed also?)”----->Yes you can put your name in the deed as a co-owner. If this is the case, then when you dispose of the new property later(if the co-owned pty is your primary residence), you need to split the capital gain that can be excluded up to $500,000 with your daughters, co-owners.
“but I need a way to give my other daughter a share of the inheritance without paying the capitol gains taxes.”---->Ass said above, I guess you may sell the property and ( I am NOT sure if you may exclude up to $250,000 of your capital gain from tax or up to $500,000 as MFJ filer) give the share of the inheritance to your other daughter; however, as long as the amount of the gift for her exceeds $13,000 for 2010 and 2011, you MUST file the IRS Form 709. You are NOT subject to the gift tax UNLESS you made a huge gift before or in 2010 alone, I mean a gift exceeding $1.13,000 million as I assume that you have one done for the gift.