Just add the lien to the cost of sale.
I would do it the other way around.
You inherited the home with a stepped up cost basis equal to the fair market value of the home. Assuming the real estate market didn't change much between the date of the owner's death and the sale, then the fair market value/your cost basis was also $27,500.
So you would report a cost basis of $27,500, a selling price of $27,500, so no gain and no loss.
Don't report this under "sale of your home", report this under sale of other property. You will be asked for the date you acquired the property, how you acquired it, and the cost basis or value. Once you enter the correct information, there should be no tax assessed on the proceeds.
The way I see the lien payoff should not affect your gain or loss. say the property was worth $100 with the $25K lien which the buyer pays so you get $75K. However, your sales price is $100K. Why would this be treated differently than the payoff of any mortgage which if it existed also would not affect your gain/loss.
from the buyer's standpoint, they are not out $27500 cash. so would that increase their tax basis in the house? or are they really out of pocket with no current or future tax benefit.
the results should not differ if you sold the property and got the extra $27,500 but then had to pay off the lien.
Not $100,000, $100.
Property was technically sold for $27,600 (lien plus $100). Since it was inherited, and assuming there was no drastic change in the real estate market, the FMV on date of death (and therefore cost basis) was also $27,600 so the taxpayer has no gain or loss.