Sibling buyout with no DOD appraisal

[Colsen28]

My sibling bought out my half of an inherited home 9 months after the death of our mother. No appraisal was done at the time of the death for the step-up basis. My sibling did have an appraisal done when they got the loan to pay me, and I had a date-of-death CMA done by a realtor. I planned to use the CMA averaged out with online estimates from Zillow, redfin, etc. to establish my step-up basis. The buyout price we agreed upon was lower than the appraisal sibling had done (20,000 less), but still within some of the lower online estimates for fmv. I thought taxes would be easy and we would do a gift of equity.  But after reading tons of stuff, it is now my understanding that a gift of equity can only be done if the seller gets an official appraisal. If I file taxes without using the gift of equity, then the step-up basis I planned to use would essentially be the same as the buyout price. Seems like I need to just go ahead and get both an official date-of-death appraisal and an appraisal for the fmv when I was bought out so I can use the gift of equity. Or does the fact that I sold only 9 months after date of death mean I can use purchase price as FMV? 

[Opus 17]

Your starting basis is the stepped up value of the house on the date of your parent’s death.  That’s your starting basis, because you and your sibling each started with half the FMV as the basis for each half of the ownership interest. Even if your sibling gave you their head to the house, they would’ve “given” you their half of the basis as well.  

If you want an even higher basis, that is going to be very difficult to prove, and I don’t think you can prove it from your facts.  Consider the example where the home was (for some reason) inherited by two completely unrelated people. If you bought out the other owner for more than their basis (the FMV on the date of death) that would increase your basis.  If you had bought out your sibling for more than your siblings basis, that could increase your basis, but you have to prove that it was a fair transaction and you paid the same price as you would have paid in an arm’s length transaction to an unrelated person.

But you apparently bought out your sibling for equal or less than the FMV, and you don’t have the right paperwork. You don’t have to decrease the basis of the home, but you can’t increase it further. Your basis is the FMV on the date of your mother‘s death.

[Colsen28]

Thanks for your reply! I used the CMA I had done and averages from online estimate sites to come up with 400,000 for my step-up basis, and I think that number is solid based on the evidence I have. My sibling and I agreed that they would buy my half of the property for 400,000. Sale didn't finalize until 9 months after day of death. The appraisal of the property my sibling had done for their loan estimated the property value at 820,000.  Since their appraisal of fmv came back higher than the price we agreed upon I thought I would just give them a gift of equity.    

eta: So my question is, would it be safe to file taxes showing that 9 months after day of death that my sibling bought me out for a similar price to what my step-up basis is, or should I get my own retrospective appraisal so I can give them a gift of equity. The problem is we already agreed upon the price and sale has finalized and I'm trying figure the best and safest way to file.  

[Opus 17]

@Colsen28 

If you bought a half interest in the house, you have nothing to report.  You don't report buying assets or investments on your tax return, only when you sell (for a gain or a loss).

If you bought something worth $410,000 and only paid $400,000, then your sibling is giving you the other $10,000 of equity, you aren't giving them anything.   If anyone files a gift tax return, it is your sibling, not you, but gifts less than $18,000 don't even need to be reported.

The only thing you need to do now is keep your documents related to the inheritance, the CMA, the appraisal, and so on, until you sell the home (however long that is) plus 3 years after you sell.  When you sell, you will ignore the appraisal and claim an adjusted basis of $800,000.  You will pay capital gains tax on any amount over that, unless you qualify for the $250,000 exclusion because you lived there as your main home at least 2 years.