@USM Professor , what I see here are two different issues :
(a) Regarding "FMV" ---- Fair Market Value of the asset inherited is important in establishing the basis of the property being transferred and ONLY at the time of death of the decedent. Thus in your case the FMV of the transferred ( by inheritance ) asset/house ( as is & where is ) is FMV -- FMV/3 for each of the inheritors ( assuming that there are a total of 3 inheritors including yourself).
(b) Regarding buying out the other two inheritors ---- Based on the above ( basis of each inheritor being FMV/3), if you paid $XX to each of the other inheritors to acquire their portion of the inheritance, then your basis of the asset obviously goes up by the amount you paid to acquire their share of the inheritance. Thus if you paid $AAAA to each of the other owners, then your basis in the asset now becomes $ ( FMV/3 + AAAA + AAAA ). A point to note here is that the amount paid to acquire each share ( $AAAA) is less than the FMV / 3, then each inheritor has given you a gift of FMV/3 LESS $AAAA and this may need to be reported ( depending on the exact amount and the yearly free gift amount ). In short and besides other considerations, your basis in the asset is FMV/3 plus any monies paid to acquire the shares of other inheritors Plus cost of any improvements prior to sale.
Thus your taxable gain is Sales Proceeds ( Sales price LESS sales expenses like commission, sales prep expenses, transfer taxes , title insurance etc. ) LESS your Basis ( as defined above )
Does this make sense ? Is there more one of us can do for you ?
