You should probably consult with a tax lawyer.
The usual rule, for a gift (when you father put you and your spouse on the deed), is that the recipient's basis is the giver's basis (what you father paid for it). But there is an exception for the gift of his home, where he retained the right to live there ("life estate"). (seehttp://www.njelderlawestateplanning.com/2010/02/articles/estate-and-inheritance-tax/life-estates-est... which states in part "If you give away an asset and keep a life estate in that asset..... the cost basis of the house is "stepped-up" to the value of the house on date of death [IRC 2036]")
More info: http://www.law.cornell.edu/cfr/text/26/20.2036-1
A life estate does not have to be explicitly established in the deed. Your father probably had an "implied life estate." If so, that would give you the stepped up basis. There is case law on this.
If any capital gains tax is due, it all falls on you and not shared by the spouse's sibling. The amount you give to the sibling is simply a gift and not income to the sibling.
