Expounding on question/answer "We inherited 1/2 interest in my husband's family home when his mother died in 1990. He sold his interest in the house to his nephew in 2007. Do we have to pay taxes on the sale?" "Yes - assuming that the amount he sold it for is more than his cost basis he would have to pay capital gans on the increase, assumng that the home was not his primary residence for at least 2 of the previous 5 years. The cost basis is the market value of the half-interest on the date his moter died in 1990 - hopefully the executor of his mother's estate let him know what that value was at the time."

The tax assessment in 1990 was $76,000; the assessment in 2007 was $100,000. Do we pay taxes on the difference? What forms do we use to do this?

You report the sale on Schedule D. Based on the figures you gave you will report a long-term capital gain of $24K (I assume the numbers you gave are for your husband's half interest, not the full value of the house). You enter both the cost basis and selling price on schedue D line 8.

You should take a look at Pub 523 for more information on the sale of a home:
Publication 523 (2007), Selling Your Home

Agreed!