My grandmother passed away in the fall of 2004.  She lived in New
Jersey.  In her WILL she left my father (her son) and I (her grandson)
half of the home each.  In the spring of 2005 my father sold the
house.  Although I do not know if taxes were withheld at the time of
the settlement I do know that settlement fees were taken from the
total at the time of the settlement. After the settlement, I recieved
a lump sum of $60,000.

My question is the following:  What taxes do I owe on this
(federal) and/or how much do I have to claim on my tax
return (1040)?  Do I have to calculate a base - i.e.
the value of the home at the time of my grandmother's death versus the
value when it was sold?  Or do I have to include the entire lump sum
of money (all
$60,000) that I received from the settlement as taxable income on my
1040?

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Clarification of Question by jjt123-ga on 20 Jan 2006 15:46 PST

Could my father potentially claim his half as well as my half on his
taxes (therefore showing $120,000 (2 times $60,000 -- remember he had
the other half originally)?

Although I don't remember, could it be possible that taxes were
already withheld at the time of the settlement and the transaction
last spring?  Would this save me from having to claim the $60,000 this
year again?

Is there a certin amount of gift and inheritance that one can receive
which is exempt from state and federal taxes?

What are my options here?  Thanks for the help.

Hello and thank you for your question.

There's no income tax on receiving a gift or inheritance.
Internal Revenue Code Section 102(a)
"Gross income does not include the value of property acquired by gift,
bequest, devise or inheritance."
http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00000102----000-.html

So the only question is whether there's any capital gains tax to be
paid when the heirs sell the property.

When somebody dies, whether or not they are wealthy enough to owe any
estate taxes, whatever they owned at death gets a new income tax basis
equal to the fair market value of that property on the date of death.
Here it is in the actual Internal Revenue Code:
§ 1014. Basis of property acquired from a decedent
http://www4.law.cornell.edu/uscode/html/uscode26/usc_sec_26_00001014----000-.html

[there's an exception for 'income in respect of a decedent' which
doesn't get a new income tax basis, but that doesn't apply here]

And if they were wealthy enough to actually owe estate tax, the
executor can choose between the date of death and the date of death
plus six months.

So if the house was worth $120,000 in the Fall of 2004 then neither
you nor your father owe any income tax.  Maybe it would have
appreciated some between Fall '04 and Spring '05 but unless there's
actually been an estate tax audit that fixed a lower value or the
estate's executor/administrator listed some lower price in any probate
papers, you shouldn't feel there's any tax to be paid.  And there's no
reason to think any income taxes were withheld on the sale.

Search terms used
"internal revenue code"  102
"internal revenue code"  1014

Thanks again for letting us help!

I would be a little weary of somebody who "searched the internet" for
this information...see a tax pro.

Richard-ga has provided an excellent answer!

I am a tax pro and I couldn't have done any better myself.

Thanks to everyone!  Good news!