When claiming orginal cost on the sale of second home is it what you paid for it or appraised value?

[lorsello]

My husband's father sold their house to my husband and two sisters for $1 in 2012.  His parents lived in the home until father passed.  the house was sold in 2016 and the proceeds were split between the three kids and their mother.  Filing as sale of second home it asks original cost.  Is that the $.25 or is it a quarter of the appraised value at the time in 2012? 

[TomD8 · Accepted solution]

This is what's called a "gift of equity."

When a house is sold to a family member for $1, the IRS considers the balance up to the fair market value to have been a gift - a gift of the donor's equity.  (A gift tax return should have been filed at the time.)

When a home is gifted, the recipient retains the donor's adjusted cost basis.  That means your cost basis now is your husband's father's original purchase price, plus any capital improvements he made to the home until the time of the gift.

Which will be much more favorable to you than a cost basis of $1.