You are correct that your brother would be "gifting" his share of the house,and filing
a gift tax Form 709 return
may be a possibility.
However, there are 2 things to keep in mind when it comes to gift tax.
1-First, there is a yearly $ amount that you may "gift" someone without having to file the form
709 gift tax. The $ amount for 2012 that you may gift without having to file a gift tax form is $13,000/person.So if you are married, or have children for example, your brother could "gift" $13,000 to you, $13,000 to your spouse, and $2667 to one of your children. (if you have any( If I did my math right, that should add up to the $28,667.
2-Secondly, you have a lifetime limit of $1,772,800 before you would actually pay any tax. (So even if your brother has to file the form 709, he will not owe any tax. The only reason for filing the form would be to let them know that he has "used" $15667 ($28667-$13000 yearly gift allowance
) of his lifetime limit.
Now that you know your brother won't actually have to "pay" any gift tax, let's look at the rest of your questions.
Any improvements you make to the house increases the cost basis. So, since the home was gifted to you and your siblings, you must use your mother's cost basis of $70,000 to start with. (You could only use the $86,000 assessed value if you had inherited
it the home after your mother died. Since she listed the 4 children on the deed in 2005, she "gifted" you each 1/4 of her cost basis)
You should keep track of all of the improvements you do, so if they change the tax laws
and you want to sell the home someday, or even if you want to leave it to the next generation, you have a record of the true cost basis.
I hope this helps