When you inherit an asset like land, and then sell the property, the only thing that gets taxed on your federal income tax return is the profit.

The profit is calculated on Schedule D. This schedule asks for the date of sale and the sale price, both of which you know. It also asks for the date acquired. Use the word "Inherited." For the purchase price, use the value that the property had on the date the previous owner died. If you don't already know this, the Executor should be able to tell you. It's either on an estate tax return, or on a property inventory that would have been filed with the county probate court.

If you sold the property soon after it was inherited, you probably only have a small gain or loss. Inherited property is considered to be held long-term, no matter how quickly you actually sold it, so you get a slightly better federal tax rate.

In addition to Reader's excellent response, the actual Taxes that you may owe the government will be either 0% or 15% of the Profit. So, the difference between the value of the land on the day you inherited it and the $40,000 that you later sold it for will be the Profit that is Taxable. Be sure to ask the Executor of the deceased's estate whether the land was valued on the date of death or 6 months after - whichever date was used should be the date that the land was valued.

Whether you pay 0%, 15%, or (in rare cases) somewhere between 0% and 15% will depend on your Marginal Income Tax rate. If your highest Tax rate (found after adding the profit to your estimated Taxable Income) is at least 25%, then you will owe up to 15% of the profit from the land sale . . . if your highest Tax bracket is no greater than 15%, then you will pay 0% (i.e., no Tax due on the sale).

Call up a Tax professional (EA, CPA, Tax attorney) if you want to be certain about the Tax bill that you are looking forward to -- then s/he may also be able to help you plan for any year-end Tax savings on your 2011 Return.