How to correctly report the taxes on a secondary home.

[carlcam]

How do I report taxes for 2025 on the sale of a secondary house with the following details:
The house was bought by my parents for $116,500 in December 1993 and was registered in their name. The deed by modified in August 1996 via a quit claim deed and my brother and I were added to the house title as joint tenants with rights of survivorship.  The grantee (my brother and I) paid $10 for the transaction.

My father passed away in July 2024 (House FMV in July 2024: ~$570,000) and my mother passed away in December 2024 (House FMV in December 2024: ~$595,000). Both of them lived in the house until their death. My brother and I lived in our own houses.
The house was sold by my brother and I in February 2025 for $595,000. The remaining amount after closing costs was $544,249.

[NCperson]

Presumably, you owned 25% of the home in August 1996 so you take on their cost basis for the 25% you owned or $29,125. 

When your father died and his 25% portion “stepped up” to market, you each (you, brother, Mom) inherited 1/3 of his stepped-up basis or $570,000*.25*.3333 or $47,500.  That gets added to your cost basis of $29,125 so $76,625.

When your mother died and her 33.33% portion “stepped up” to market (so $595,000*1/3 or $198,333), you each inherited 1/2 of her stepped up basis or $198,333*.5 or $99,167.  That gets added to your cost basis of $76,625 so $175,792.

Since the sales price (net of closing costs) was $544,249 and your share is half of that, or $272,125.  Your capital gain is $272,125 minus $175,792 or $96,333.

For simplicity, this assumes there were no cost improvements along the way.  Including those improvements (and the math gets trickier as when the cost improvements occurred impacts the treatment given the step-ups) would reduce the capital gains.

p.s. you may want to check what is in that $544,000.  That is 91% of the sales price.  While 6% may be the sales commission, what is the remaining 3%?  Are they all bona fida closing costs? 

[Hal_Al]

The usual rule, for a gift, is that the recipient's basis is the giver's basis (what you parents paid for it). But there is an exception for the gift of your parent's home, where they retained the right to live there ("life estate"). "If they give away part of the home and keep a life estate in that home..... 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 parents probably had an "implied life estate." If so, that would give you the stepped up basis. There is case law on this. 

http://accessiblelaw.org/Documents/LifeEstates-Inheritances.pdf

You may want to Check with a lawyer.