Generally, if you inherit property, you receive a tax basis that is equal to the property's value at the date of death (or six months later, if the executor elected the alternate valuation date, this applies only if a Form 706 Inheritance Estate Tax Return was filed).

When you sell property that had been inherited, you recognize gain or loss based on the variation from the tax basis.

For example: You inherited land from Aunt Jane, which she purchased for $1,000 but was worth $8,000 at her death. You sell the land for $8,100, less $500 in commissions and other costs of sale. Your net selling price is $8,100 - 500 = $7,600. Your tax basis is the estate valuation of $8,000. You have a loss of $400 on the sale. (Note: If Aunt Jane had paid $10,000 for the land, your sale would still result in the same $400 loss. What she paid for the property is not relevant if it passes to you upon her death.)

Under the tax law as it stands now, any gain or loss would be considered as a gain or loss from an asset held for more than twelve months but not more than eighteen months. This means that any gain would be taxed at a rate not to exceed 28%. However, there is a proposed law that will treat such gains or losses as being from assets held for more than eighteen months, meaning that gains would be taxed at either a 10% or 20% rate, depending on your tax bracket.

CAUTION - If your name was placed on the deed or title to the property, then you DO NOT inherit the property but rather obtain ownership due to the change in title.  Under this method your basis or cost in the property for figuring your gain or loss is what Aunt Jane for the property. Thus you would have a $2,400 loss.  NOTE, rarely in this situation is there a loss, almost always a profit. That is why placing your name on the deed/title of appreciated property is bad planning.