In that case, basis is determined by 1(ii), the transferor's adjusted basis. The transferor being the sibling who inherited 1/3 of the home with a stepped up basis of $8,833. So the full basis is transferred.
(By way of additional explanation, rule (2) covers situations where the gift has increased in value more than the transferor's basis, and allows the increased basis to pass to the recipient (transferee) if gift tax is paid. Here, we are not discussing property that increased in value after the sibling inherited it, so we don't need to discuss rule 2, or the rule for property that has decreased in value.)
The taxpayer's basis in the property is the full $26,500.
