My wife and I are US citizens and my wife's mom passed in 2006 leaving her residential proeprty in Mexico which we do not live in but we do rent to offset maintenance expenses. Since 2006 we subdivided the residential proeprty into 2 pieces to make it easier to sell, a single family residence, and a duplex. In 2010 we sold the single family residence. In 2010 we paid the Mexican taxes due on the sale and moved the remainder of the cash to the US. We paid about a third of that cash to a family member that loaned money to my wife's mom years ago, (unrecorded loan) and we invested the remainder of the cash, (put into a retirement account). Are there any taxes due to Uncle Sam, and if so how much and how is it calculated?

1. You inherited the property in 2006. Your cost basis of the property is fair market value of the property on the date of death.
2. In 2010 you sold the property. If sale proceeds are more than your cost basis, you have a long term capital gain that need to be reported on schedule D (Form 1040). Also attach From 1116 to claim credit for taxes paid in Mexico (Mexican taxes).
3. The cash that you returned to a family member (loaned money) does not change any thing on schedule D or Form 1116. Your U.S. Tax Return: Tax on Inheritances (http://taxipay.blogspot.com/2008/02/tax-on-inheritances.html)

What MukatA stated about long-term capital gains is accurate, but, because you rented the property, the property became a business property, so the sale would be recorded on Form 4797 after the depreciation is factored in.

The mechanics of calculating the tax is a bit much to post on this forum, but, generally, the tax rate will be about 5% of the gain.

If you need professional help filing your return, email me at [email protected] or [email protected].