Inheritance or gift?

[Sticky]

Before my father passed away he made sure my brother, sister and I knew the house was to be split between the three of us evenly. He wanted to avoid us having to go through the process of creating an estate and signed the deed over to me ( as I was local and would be best suited to deal with taxes and other tasks). Now once the house is sold and I give my brother and sister their share of the money, will it have to be claimed as a gift and subject to gift tax? Or will it be an inheritance? My brother's concern is that if he gets audited and has no proof that it was an inheritance he (or I) will face penalties. 

[Critter]

That was a poor choice just to avoid probate since there are better ways to handle it  so I highly recommend you seek local professional assistance for this matter and then for the tax return.  So much depends on when dad signed the property over, when or if you ever changed the deed and if he remained in the home and for how long.  Way too much to discuss in this public forum adequately.  

[dmertz]

Unless the transfer to you involved a life estate, there doesn't seem to be any inheritance in what you have described.  It appears that your father gifted the house to you subject to gift tax requirements, your sale of the house is taxable income to you to the extent that the sales proceeds exceed the cost basis your father had in the house (which became your cost basis upon gifting the house to you), you do not meet the residency test to allow you to exclude any of the gain from taxation on your tax return, and any money that you give to your siblings will be gifts from you to your siblings subject to gift tax requirements.

[TomD8]

If the house was deeded only to you, and your brother and sister were never added to the deed, then the money they receive from you would be a gift.  An inheritance is something received via a decedent's will or estate.  

By the same token, if you were the sole owner at the time the house was sold, any capital gain tax due on the sale of the house would be owed just by you.  The calculation of your capital gain would depend on a number of factors (such as whether or not a life estate existed), which is why @Critter suggested you seek professional help.

Gifts to an individual that exceed $15,000 (2019) must be reported to the IRS on Form 709: https://www.irs.gov/pub/irs-pdf/f709.pdf   However, no gift tax is actually due until the donor's gifts exceed the lifetime exclusion of $11.18 million.  The obligation to file Form 709 rests with the donor, not the recipient.  The recipient of a gift need not report it on their tax return, as a gift is not taxable income.