If your sister had no ownership interest in the property (she was not on the deed), then she is not liable for any capital gains tax upon its sale, and she would not report it on her tax return.
Note that since you acquired the property prior to your grandmother's passing, your cost basis is her original cost, plus any capital improvements. It is NOT the fair market value at the time of her death. Your capital gain is your net sale proceeds minus your adjusted cost basis.
**Answers are correct to the best of my ability but do not constitute tax or legal advice.
