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 dying prior to January 1, 2010 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.

The basis of property inherited from a decedent dying 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 $1.3 million and an additional $3 million in the case of a surviving spouse.  The executor of the decedent’s estate is required to provide a statement to all heirs within 30 days after filing the decedent’s final income tax return 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 (PDF), Capital Gain and Losses: