You will report the transaction in the year in which the townhome was actually sold (i.e., if it sold this year, 2020, you will report it on your 2020 income tax return which you will file by next April, 2021).
The transaction will be taxable only if you have a gain, which will be measured by the extent to which your sales price (less selling expenses) exceeds your basis in the townhome. Your basis in the townhome, if inherited and included in the decedent's gross estate, will be the fair market value on the date of death of the decedent plus any improvements made thereafter.
You cannot recognize a loss on this transaction since the townhome was held for personal use.
