she has been told by the mortgage holder that she is not liable for the mortgage
Sounds like an unscrupulous lender to me, that doesn't want to educate you on the facts, because they basically want to legally "steal" that property from you...rest assured that if the mortgage payments are not made they can and most definitely will do that too.
Unless you can get a better rate by refinancing, assume the existing mortgage. The property itself is collateral on the mortgage and if mortgage payments are stopped the lender has every right (and will exercise that right) to foreclose on the property. Any losses you experience on such a foreclosure will *NOT* be deductible on your tax return, ever.
Generally, all rental income and rental expenses incurred after the passing of the owner and before the actual transfer of deed are reported on the final tax return of that deceased owner or the estate return of that deceased owner up to the date of transfer from the estate to the beneficiary recipient. But there is no law at any level of government that requires this. That's just the way it's "usually" done. It doesn't have to be.
Regardless of when the actual transfer of deed occurred, you are required to report all rental income that you actually received in the tax year.
If the beneficiary recipient is the named payee on the 1099-MISC (amount of rent paid to the beneficiary reported in box 1) then the beneficiary recipient is required to report it on their tax return. Period. Now if the named person on that 1099 MISC did not actually received the amount stated, there are several things to take into consideration in order to figure out who is responsible for the difference.
If the difference was paid to the estate and that rental income was then passed to the beneficiary recipient through the estate (probably included on the 1041-K1 they received) then it's taxable income to the beneficiary recipient *UNLESS* you can prove the estate paid taxes on it "before" it was transferred/paid to that recipient. (Easy to prove by reviewing the 1041 of that estate, which as a named recipient of proceeds of the estate, you have a right to see.)
If the estate did pay the taxes on it prior to paying that specific rental income to the recipient, then the issuer of the 1099-MISC needs to issue a 1099-MISC to the estate for the amount actually paid to the estate by that issuer, and a corrected 1099-MISC to the recipient for the amount they actually paid to the recipient.
More than likely, I suspect the amount reported on box 1 of the 1099-MISC you received, is the amount that was actually paid to the recipient.
Overall please keep in mind that my responses are from a "federal" point of view. Laws dealing with the property of a deceased person differ state to state, and differ quite significantly with some states. So I would highly advise you seek the legal advice of a professional in your local area.
Now I would not expect a tax pro or tax expert to really know the laws on your mortgage situation. Their knowledge is on taxes, not legal situations that really have nothing to do with taxes. However, I would expect an attorney that specializes in Wills, Estates and Probate to be knowledgeable in this area, or be able to steer you to a more specialized attorney who is. So while a tax pro or tax expert is best for answering your tax questions, in most cases they are the worst and least knowledgeable for answering your non-tax legal questions... such as your query about mortgage liability.
You will find the cost of professional help in this area to be well worth it, and quite a pittance when compared to what you can "and will" lose if that mortgage is not paid.
