In general, whenever you sell property you owe capital gains tax on your gain. You don't qualify to exclude the gain since you didn't live there as your main residence.
The gain is the difference between the selling price and the adjusted cost basis. You can also reduce the selling price by certain selling expenses, like legal fees, real estate commission, inspections that the seller paid for, and transfer taxes. (You can't reduce the selling price by repairs, cleaning, or staging.)
Figuring your cost basis is where it's gets difficult, and why you need to know the exact form of the deed.
If she added you to the deed but retained a life estate, then in the IRS view, you inherited the entire house. This is because the life estate gives her certain rights that she would not have if you were an equal owner. When you inherit property, you inherit a "stepped up" cost basis equal to the fair market value on the day she died. Assuming you sold the property rather soon and there were no major changes in the real estate market, then the selling price is also the FMV, which is also your basis. So you have no capital gains and owe no tax.
However, if your grandmother added you to the deed "in fee simple" this means she made you an equal owner in 2009. Basically, she gave you half the house. When you give property you also gift your cost basis, so she gave you half her cost basis. Then when you inherited the other half of the house in 2017, you inherited a stepped up basis on that half. So your cost basis when you sold the house is (1/2 the FMV in 2017) + (1/2 your grandmother's basis as of 2009).
What was your grandmother's basis as of 2009? That's where things get harder.
Suppose she bought the house with a spouse in 1970 for $20,000 and the spouse died in 2005. Your grandmother inherited half the house from her spouse in 2005, so her cost basis would be (1/2 the purchase price) + (1/2 the FMV when her spouse died).
The basis is also adjusted for permanent improvements like a new roof, furnace, and remodeling, if you can prove how much those things cost. So let's consider a complicated example.
Home was purchased with a spouse in 1970 for $20,000.
Grandmother and spouse remodeled in 1980 for $25,000.
Grandfather died in 2005, at that time the house was worth $100,000.
You were added to the deed in 2009.
In 2010, you replaced the furnace and roof for $15,000.
When your grandmother died in 2017, the home was worth $175,000 and that was the selling price.
Your grandmother's cost basis on her half the house as of 2005 is $22,500 (Half the purchase price + half the remodeling cost). When her spouse died, she inherited his half valued at $50,000, so her cost basis was then $72,500. She gives you half the house in 2009, so your share of the cost basis is $36,250. You add to your cost basis, half the price of the improvements you made ($7,500) for a total of $43,750. When your grandmother died, you inherited her half valued at $87500. Your total cost basis is now $131,250. The selling price was $175,000 and you had allowable expenses of $14,000. Your capital gains income subject to capital gains tax is $29,750.
Got all that?
(On the other hand, if she bought this particular property after your grandfather died, and then gave you half, then she just gave you half her cost basis. Same general principle but easier to calculate.)
In turbotax, don't report it as the sale of your house, since you didn't live there. Report it as the sale of "other investment property." Turbotax may ask for the original "purchase price" but what you really enter is your adjusted cost basis, which you have to figure out on your own. Method of acquisition is inherited, selling price and selling expenses are fairly obvious, and Turbotax will calculate your gain and your tax owed.
If you need to know the purchase price your grandmother paid, that will be in the county records. If you need to know the FMV when your grandfather died, you can ask an appraiser for a value based on historical records. If you don't know the cost of improvements, guess or leave them out of the calculation, but remember that if audited, the IRS does not have to give you any adjustments to basis that you can't prove to their satisfaction. Anything you can't prove will lower your cost basis and increase your gains and tax owed.
*Answers are correct to the best of my ability at the time of posting but do not constitute legal or tax advice.*
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