My grandmother died in 2001. She left a living will estate for her roommate to live in the home until she died and then my sister and I would then own the home.The roommate died in 2008. So once the roommate died we were able to sell the home. We sold it a few months after the roommate died and split the proceeds. I have read in two different sites that capital gains taxes do not have to be paid on inherited property. It stated that a relative was able to pass down up to $2 million in her estate tax free. Any amount from the sell of her home would go towards the estate. Please help!

Thanks,
Christy

Gain on the sale of inherited property is taxable. In this case it would appear your basis would be the fair market value on the date of your grandmother's death. The difference between this and the amount received should be the gain.

I'm not sure how the $2 million relates to this. For reporting on an estate return you would use the fair market value on date of death.

You should consult with a professional in your area to have all the facts reviewed.

The cost basis of the property you inherited is the FMV at the date of death. If you sold at a gain, you must report it on schedule D (Form 1040). Also you have the requirement to file the final return of the deceased if the income was more than the filing requirement.
Read: Your U.S. Tax Return: Tax on Inheritances

Your grandmother's estate MAY have used the 6-month option in determining the FMV of the house. Under that option, the FMV is determined based on the date of your grandmother's date PLUS six months. You need to check with the executor to determine if they took that option. If nothing was done, the FMV on the date of death is used.

Now, depending on WHERE the house is located, it is very possible that the house sold for LESS than date-of-death FMV. If that is the case, you can also claim a capital LOSS on your return. If the loss exceeds $3,000, you can reduce other income (salary, interest, dividends, etc.) by $3,000, and the remaining loss carries forward to future years.

The complexity of this situation SCREAMS the need for a tax professional to prepare your return this year. That is my recommendation.