My mother passed away in May of 2010 and I had to pay my brother $68,000 to buy out his part of the house. There was not enough money in the living trust to give him 50% of the estate nor was the house specifically left to me. Will I owe any taxes on the house. I plan to live there and have no thoughts of selling at this time. My estate lawyer seems to think I will owe some sort of taxes on the house since I have to pay my brother $68,000 for his portion of the house.

If you have an estate lawyer that can not tell you to the penny what you should owe, you need a new attorney.

You shouldn't owe any tax but your brother may. The house should have been valued at the time your mother died. If your brother's share was valued at less than the $68K you paid him then he may owe tax on that difference.

Neither you nor your brother should owe ANYTHING in terms of income taxes, and the estate is probably valued well below the minimum that would trigger an estate tax bill.

Neither you nor your brother should owe ANYTHING in terms of income taxes, and the estate is probably valued well below the minimum that would trigger an estate tax bill.

True enough, especially considering that there is no estate tax in 2010. However, the cost basis for the 1/2 of the house that the brother has sold is equal to 1/2 the decedant's original cost basis - there is no restating of cost cost basis to the fair market value for property inherited in 2010 as there was in 2009 and will be again in 2011. So ironically the brother may very well be facing a tax issue specifically because of the elimination of estate tax in 2010, and the OP will as well when he sells the property down the road.

Ebaines, you ARE correct. I keep forgetting about the fact that the basis of the asset reverts to the GIFT tax basis vice the ESTATE tax basis for 2010.