Question
Is money received from the sale of inherited property considered taxable income?
Answer
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:
The fair market value (FMV) of the property on the date of the decedent's death.
The FMV of the property on the alternate valuation date if the executor of the estate chooses to use the alternate valuation. See the Instructions for Form 706, United States Estate (and Generation-Skipping Transfer) Tax Return.
For information on the FMV of inherited property on the date of the decedent’s death, contact the executor of the decedent’s estate. Also, note that in 2015, Congress passed a new law that, under certain circumstances, requires an executor to provide a statement identifying the FMV of certain inherited property to the individual receiving that property. Check IRS.gov for updates on final rules being promulgated to implement the new law.
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 Schedule D (Form 1040), Capital Gains and Losses, and on Form 8949, Sales and Other Dispositions of Capital Assets:
If you sell the property for more than your basis, you have a taxable gain.
For information on how to report the sale on Schedule D, see Publication 550, Investment Income and Expenses.
Under the new law passed by Congress in 2015, an accuracy-related penalty may apply if an individual reporting the sale of certain inherited property uses a basis in excess of that property’s final value for federal estate tax purposes. Again, check IRS.gov for updates on final rules being promulgated to implement the new law.
More here with links to the relevant publications:
https://www.irs.gov/faqs/interest-dividends-other-types-of-income/gifts-inheritances/gifts-inheritances
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