I did say there were no inheritance tax for federal or NJ.
The federal will want capital gains tax using the fmv as a cost basis on the date of death.
The federal laws changed when they eliminated the inheritance tax. Now, the property you inherit has a cost basis of the fair market value on the date of death. The executor has the opportunity to use an altenrative method for determining the FMV. THis is why I direcdted you to the estate tax return. The FMV that you must use in determing any capital gain is what appears on the estate tax return.
In order to avoid any capital gains at all, you have to live in and own the home for two out of the past 5 years from the date you inherited it. If this were the case, you would be able to exlcude 250,000 of captal gain form taxes filing single or maried seperate returns, or 500,000 filing a joint return.
The federal does not have a fixed amount threshold. There is simply no inheritance tax by the fed.
Also with respect to NJ, there is no threshold for children inheriting property from parents. Read this quote: "If a decedent's death occurs on or after July 1, 1988, property passing to a decedent's surviving parents, grandparents, children, stepchildren or grandchildren is entirely exempt from the tax." (downloaded on 09/28/2006 from http://www.state.nj.us/treasury/taxation/index.html?ot7.htm~mainFrame)
The exchange of property and the roll over of gains for a residential property was eliminiated for the rules I stated above. (Maximum Capital gains Exclusion)
Since this is a residential property that was not used for investment purposes, it is not eligible for section 1031, like kind exchange.
The postponed gain was an old rule that is no longer in effect.
REFERENCE: IRS Publication http://www.irs.gov/pub/irs-pdf/p523.pdf#search=%22IRS%20publication%20523%22