Our mother passed away in June 2008. My sister and I inherited her home, and sold the property at market value in September 2008, and split the proceeds 50/50.

How is that sale reported on my 2008 tax return?

1. Any inheritance is not taxable. If you sell later on, then you will report the sale. Your cost basis is the fair market value at the date of death. Read: Your U.S. Tax Return: Tax on Inheritances

2. You must file the last tax return and all other due returns of your mother.

You report the sale and any capital gains on Schedule D.

You split all the pertinent figures (basis, costs, sales proceeds) in half and each sister reports half on her return using Schedule D.

You MAY want to get professional tax help on this return, as it is a bit tricky.