1. Because California is a community property state, your father’s cost basis is 100% of the fair market value on the day your mother died. Start by documenting that fact and saving your records until you have all sold the home +6 years after that.
2. Then, your father has gifted each child 25% of the home with his cost basis. Assuming that is more than $15,000, your father will need to file a gift tax return form 709 to report the gifts. No gift tax is actually owed unless your father’s lifetime gifts and estate are more than $11 million, but the gift tax return must be filed so that the IRS can keep track of his gifts against his lifetime limit. The deadline for form 709 is also April 15, but it is not included with the regular tax return and TurboTax does not prepare this document.
3. Whenever you sell the home, you and your sibling will have a capital gain equal to the difference between 25% of the selling price and your 25% cost basis. There is no way for you to not pay capital gains tax on your gain. However, if you sell in 2021, your gain only represents 25% of the increase in value since the day of your mother’s death in 2020.
4. Your father will have a capital gain equal to 50% of the selling price minus his remaining 50% cost basis. Your father qualifies to claim a $500,000 capital gains exclusion as a widower, as long as he sells the home within two years of the date of his wife’s death and he has not remarried.
