Our best advice is to pull all your paperwork together and find a qualified CPA to help you answer the question. Generally speaking, a 1099-S normally shows the gross proceeds from the sale of a real estate transaction. In the situation you outline, the appropriate question seems to be whether or not there was a capital gain as the result of the sale. Typically, the cost basis on a transfer at death would be the value of the property on the date of the owner’s death.

However, it may be that your mother-in-law gifted some or all of the property to her daughters (by transferring in full or adding them to the title of the house) while she was still alive. With a gift, the cost basis remains that of the original owner. Depending on how things played out, there could be very little in terms of tax implications. But this seems like a good time to enlist the help of an expert.