determining the cost basis for inherited home?

[Jered Sturm]

I had a good friend ask me this question today and I was not sure on the answer. Before I call our tax advisor to help my friend I would love to hear from the wise people of BP on the Issue. 

My friend bought a vacation home from his parents for $1 before they died. This was their way of transferring it to him before their death. 5 years later he is now selling the property. He was under the impression that his cost basis for tax purposes is $1. I said you may want to look into that more because I believe the cost basis of an inherited property is the fair market value at the time it was inherited. However I wasn't sure if this could be classified as "inherited" since it was transferred prior to their death. Or maybe I am way off even on the cost basis concept all together?

Any CPA, tax experts, accountant out there that can shed some light would be much appreciated.