@USM Professor and my colleagues @Opus 17 , @M-MTax , @VolvoGirl , while this is very good discussion and an illuminating one at that , I see the situation a bit different.
Assumptions ( just to move away from reality of the case :(
( a) inheritors 3;
(b) Estate of the deceased -- 1. House ( FMV of 26000 ); 2. Debt/payables to brother ( $17000 ) for care and incidentals.
A as executor buys the house for $26000 ( FMV). Liquidates the debts ( thus brother made whole ). The remainder of $9000 is then distributed to each of the inheritors.
Thus the buying brother's basis in the [property is $26000. He now spends another $10,000 to rehabilitate the house and sells the house for $40,000. His basis in the transaction is $37,000 ( $26,000 purchase price to provide cash for the estate, pay off the creditors etc. ). His gain before adjustment for sales costs is $3000.
What is wrong with this scenario ?
I stand down
pk
