To determine if the sale of inherited property is taxable, you must first determine your basis in the property. The basis of property inherited from a decedent is generally one of the following:

 If you or your spouse gave the property to the decedent within one year before the decedent's death, see Publication 551, Basis of Assets.

Report the sale on Form 1040, Schedule D , Capital Gain and Losses:

For estates of decedents who died in 2010, basis is generally determined as described above.  However, the executor of a decedent who died in 2010 may elect out of the estate tax rules for 2010 and use the modified carryover of basis rules. 

Under this special election, the basis of property inherited from a decedent who died during 2010 is generally the lesser of:

However, the executor of the decedent’s estate may increase the basis of certain property that beneficiaries acquire from a decedent by up to $1.3 million, but no more than the fair market value of the property at the date of the decedent’s death.  The executor may also increase the basis of certain property that the surviving spouse acquires from a decedent by up to $3 million, but no more than the fair market value of the property at the date of the decedent’s death.  The executor of the decedent’s estate is required to provide a statement to all heirs listing the decedent’s basis in the property, the fair market value of the property on the date of the decedent’s death, and the additional basis allocated to the property.

Report the sale on Form 1040, Schedule D , Capital Gain and Losses, as described above.