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I would read the FAQ section. There is a lot of good information on the basis for property that is inherited and received as gifts. The general rule is that for gifted property you will get the basis that the donor had in the property. For property that is inherited your basis is the fair market value on date of death. So for property that is inherited, generally the only capital gain that is taxed is the differance in value from the date of death and the date the property is sold.

For any item sold within a year or so of the date of death that does not an easily determined fair market value (like a $15,000 painting) and an IRS Death tax form 706 is not filed, i would say that the fair market value at time of sale is the best indication of the fair value at date of death and report the sale price and cost basis as the same amount on your 1040. Unless something unusual happen in the marketplace the IRS would accept this method.

A small point is that there is no federal inheritance tax, the tax is a death tax based on all asset held by the decedant on the date of death (note to the Fool, i think you should not have a heading call inheritance tax, it gives readers the wrong impression). So your grandmother paid no taxes on the property inherited, if any taxes were paid they were paid by the decedants estate.

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