My mother passed Dec 2020 and had everything in an irrevocable trust. We sold the property in 2021 and now my sister is trying to do the taxes on the property, and they are saying we owe capital gains? Is this correct?

[Carl]

We sold the property in 2021 and now my sister is trying to do the taxes on the property, and they are saying we owe capital gains?
What is/was "the property"? Her primary residence? Depending on how the trust was set up, if your mom lived in the property for at least 2 of the last 5 years she owned it, counting back from the closing date of the sale, up to $250,00 of capital gains would be tax free. ($500,000 if filing a joint return). But assuming you're completing a 1041 trust return, I myself don't know how that works if the property is owned by the trust. Again, it depends on how the trust was set up, as well as the laws governing trust of whatever state it was set up in.

As I would expect you to be liquidating the trust and filing a final 1041 for this trust, you may find it better to seek professional help, and allow the trust to pay for that.  Especially if state taxes may apply here.

[Anonymous_]

My mother passed Dec 2020 and had everything in an irrevocable trust.

You need to have the governing instrument (the trust) review by a local tax and/or legal professional.

Chances are the trust will have received a basis in the home that was stepped up to its fair market value on the date of your mother's death (this typically requires an appraisal for the date of death valuation).

If that is the case, then any gain (or loss) would be measured by subtracting the stepped-up basis from the sales price (less selling expenses). 

Note that you will not be able to utilize the "2 out of the last 5 year" rule (i.e., the home sale exclusion) in this instance.