@pk
I believe the original poster said they invested $31,000 to rehab the house, not $10,000. Also, I am not aware that if sibling A (the executor) voluntarily helps his brother (the deceased, sibling D), with living expenses before D died, there is any way to recover that from the estate. The expenses of the estate after his brother died, paid by sibling A, were $2500. I don't see how the expenses that sibling A paid to help out sibling D before D's death create a legal obligation, especially as there seems to be nothing in writing. That was the purpose of making out a will leaving the house entirely to A, but the will was never signed.
The three remaining siblings (A, B and C) co-inherited the house because there was no will.
If the three remaining siblings had co-owned the house during the 8 month renovation process, and sold the home together, then each sibling would be entitled to receive 1/3 of the proceeds after reimbursing sibling A the $2500 of estate expenses plus the cost of renovating the house that was paid out of pocket by sibling A.
However, that's not what happened. Sibling A bought out sibling B and C for $3000 each. This seems to have represented a discount price based on the expenses previously paid by sibling A and the need for significant renovations, and the fact that this was the only way sibling A could only perform the renovations without going through probate. Sibling A has still not specified the exact selling price, but based on the way he was calculating basis before the discussion began, and including the FMV of $26,500 and the renovations of $31,000 and proposed capital gains of $184, the selling price seems to have been around $58,000, give or take. Assuming that to be close, sibling A has $58,000 of cash proceeds. Subtract the $31,000 for renovations and the $2500 for estate expenses (A reimbursing themself), that leaves $24,500, or $8,166 per sibling. Since A has already paid sibling B and C $3000 each, A's remaining obligation to B and C is $5,166. However, that is a moral obligation, not a legal one, unless A, B and C have a verbal or written contract about dividing the proceeds of the house sale. (If we take the other $15,000 of pre-decease expenses into account, the remainder to be split 3 ways is $9500, or $3166 per sibling, and since B and C have already received $3000, the remainder due to them is $166. That would depend on whether the voluntary assistance with living and medical expenses creates a legal or moral obligation.)
But that is really beside the point. A's original question was how to determine the basis when reporting the transaction on their tax return; how much of the gain, if any, is taxable. Here, § 1.1015-4 comes into play. If the FMV was $26,500 (determined by the offer to buy by the shady buyer), then even though it was co-inherited by A, B and C, by the time A had full legal ownership, A's basis is stepped up to the FMV of $26,500. A can then add renovation expenses (but not repair expenses), and A can include some other legal expenses from publication 523 that they may not have been aware of.
And I don't think A needs to hire a tax attorney to figure this out, unless they need guidance on the repair vs improvement issue. A may spend more money for tax advice than they would save in taxes. A just needs to carefully document everything and keep the paperwork for 7 years, in case of audit.
