Since you owned this house and it was occupied by your brother, that would be considered as personal use by you for tax purposes That means you are selling a second home, and the loss on the property is not deductible but any gain is taxable. The payoff of the mortgage does not count for anything in this transaction.
So, your sale price is the $490,000 minus closing costs, no inclusion of mortgage payoff anywhere. If part of the closing costs consisted of the payoff of past due mortgage payments, subtract those from the closing costs. You have a taxable gain so far. Your cost basis is the original cost paid plus closing costs. Thur purchase closing costs would not include interest paid or principal mortgage payments or property tax.
You enter this by typing Investment income in the Find widow on the upper right, hit enter, then the Jump To. Choose second home as investment type.
