Man, I love the free tax advice thread, though I always feel guilty, like I'm making you work during your time off.
This is what I do man! I'm the reference librarian reading the newspaper until someone asks a question.
I have a weird tax situation this year, to wit: several years ago, my wife's father died, leaving some nebulous overseas properties to her and her siblings and mom. They all got percentages like 40% of this house, and 33% of that commercial property, all in a foreign country. Now, they never declared any of this on their taxes at the time, as they had no idea what the property was worth, if anything at all, and even if they would get the property as there was legal action pending in this foreign land.
Fast forward to 2009: somehow, miraculously, someone actually wanted to purchase one of these parcels in a far away land, and did, to the tune of a fair bit of cash. Now, my wife got 40%, her sibling another 40%, and her mom 20%, all in a foreign currency. How the hell do we declare this on our taxes this year? Is it a capital gain, even though the property technically became hers six years ago? (Complicating things, the money came in checks drawn on a foreign bank, but not in the exact percentage from the inheritance. They sent over all the money and let the family split it up in the appropriate percentages. I don't know that the IRS is going to take that on faith.)
Should I hire someone from the website you linked to, to have a professional opinion (and some cover if the IRS disagrees with our assessment of the situation)?
First inheritances are not part of gross income and are not even reportable. What would be reportable would be any capital gain. This generally would be any increase in the selling price over the Fair Market Value of the property on the date of death (or alternate valuation date if used). Given the state of the real estate markets, I don't think it is obvious there would be a gain. Start by seeing if anyone can give you a letter on the FMV at date of dseath (the attorneys who lhandled the sale?).
Second, you are functioning as a "nominee" when you accept payment on behalf of everyone and then split it up. Be proactive and file a Form 1099-S for each of the other heirs, and append a note explaining what you have found out about the basis and amount of gain.
Good luck and let me know when the next batch of questions on this come up.