Property Acquired from a Decedent
The basis of any property acquired from a decedent on or before January 1, 2010, is its fair market value on the date of the decedent's death or on the alternative valuation date. This "stepped-up" basis rule applies to property acquired by bequest, devise or inheritance. It also applies to property required to be included in the decedent's gross estate for federal estate tax purposes even though it was the subject of a lifetime transfer, unless the transferee sold or otherwise disposed of the property acquired directly from the decedent without passing through the estate, qualifies for a "stepped-up" basis (Code Sec. 1014; Reg. Section 1.1014-1 thru 1.1014-8.
Please keep in mind that you do not pay a capital gains tax when the transfer occurs. You only would adjust the basis to fair market value. If you sell the house, then a gain or loss would occur.
Please see the attachment below: