Sale of Inherited Home and Gift Taxes

Don't try to handle this yourself. Consult a local tax professional. There are too many complications to cover it all here.

As others have said, professional tax help is advised.  That said, here are some things to be aware of.

Q. Since we sold to a family member for less than appraisal value would that be a lost if stepped up value to 2023?  

A. Maybe. You are not allowed to deduct a loss, in a sale to a close family member. But, a nephew is not considered close enough (reference:https://www.law.cornell.edu/uscode/text/26/267). In addition, the difference between the value and the sale price is  a "gift of equity" and requires a gift tax return if the difference amount is more than $17,000.  

You ability to deduct a loss is further limited by how the property was used, after you inherited it, but before you sold it. You may not deduct the loss on personal use property. If the house was vacant during that period, it is considered investment property and the loss is deductible. 

Q.  I figured its inheritance and no tax consequences?

A.  It probably is, depending on the details.  The usual rule, for a gift, is that the recipient's basis is the giver's basis (what you parents paid for it, adjusted for the stepped up value at your mother's death). But there is an exception for the gift of a home, where he retained the right to live there ("life estate"). "If you give away an asset and keep a life estate in that asset..... 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

Q. Well a 1099-s was generated for the sale in my name?

A. The 1099-S should be reported on your tax return, but there is a way to show it was the sale of an inherited asset. Besides, there was no capital gain to report. You report $0 capital gain, on your tax return. 

Q.  Would the starting value of the home be when I was added to the deed in 2008 or value at time of death 2023? Since we sold to a family member for less than appraisal value would that be a lost if stepped up value to 2023?  

A.  Half the original cost basis steps up in 2008, on your mothers death (100% step up if they lived in a community property state). In 2023, his half steps up (your half does too, if the life estate rule applies and it probably does.

Q.  Is there any way around the gift tax?

A. "Gift Tax" is somewhat of a misnomer.  Even though a gift tax return may be required, very few people ever actually pay federal gift tax. The purpose of the gift tax return is usually only to document a reduction in the allowable estate tax exemption.
See https://turbotax.intuit.com/tax-tools/tax-tips/Tax-Planning-and-Checklists/The-Gift-Tax-Made-Simple/INF12127.html   

If his will stated that the proceeds (from the sale of your half) was to be shared, then your distribution, to them,  may not be considered a gift. 

I think there's one other thing missing from the discussion.

If your father retained a life estate (the right to live in the home as long as he was alive), then you inherited the entire house with a stepped up basis.  That would mean you had no taxable capital gains, as long as you sold the home at or below the FMV on the date of your father's death. 

If he did not retain a life estate, then you inherited half the house with a stepped up basis, but the other half of the house (the half gifted to you in 2008) has a cost basis equal to half your father's cost basis in 2008, which is calculated from the purchase price, cost of other improvements, fair market value when your mother died, and whether or not your parents lived in a community property state.  

Now the key is, a life estate can be in writing in the deed, or it can be implied by the facts and circumstances even if is not in writing.   If you can show by facts and circumstances that your father retained an implied life estate, your tax position suddenly becomes much simpler.  This is another reason to consult a professional tax and legal advisor.