"My mother placed her home in a life estate in 2005 at age 84. Mom passed away in 2006. Her home was sold in 2007. I was wondering what tax liability is. I cannot get a answer from the IRS."
First, there are income, gift and estate tax considerations:
Gift tax: If your mom "placed her home in a life estate" it sounds like she might have given the house via deed to you and/or other heirs while at the same time reserving (keeping) for herself the right to live in the house for the remainder of her life (that's called a life estate). Because the facts are fully clear, and the documents to do this are important, you need to sit down with a tax expert). If this is what happened, your mom would have been making a gift to you (and any other heirs listed as "grantees" on the deed. The value of that gift may not be an issue for gift tax purposes if the gift was final ("complete" in tax jargon). This would be the case if she kept the right to live in it.
Estate Tax: If your mom held the right to live in the house until she died, then the full value of the house would be included in her estate at her death. If all the assets and rights she owned exceeded the maximum amount she could bequeath without a federal estate tax in 2006, her estate would owe an estate tax.
Income Tax: If your mom had a life estate so that the full value of the house was included in her estate when she died, then the "tax basis" (the amount used to determine gain or loss on sale) would be increased ("stepped up" in tax jargon) on her demise to equal the fair market value (FMV) of the house as of the date she died. If this occurred, then the only taxable gain might be any appreciation (increase) in the value of her residence from the date of her death until the date the house was sold. But you're not done yet. What happens from a tax perspective will depend on what was done with the house after she died. If you (or all the heirs) were listed on the deed in 2005 that created the life estate, then the house would have been owned by you (or you and the other heirs) as of her death. Assuming that you did not live in the house as your residence, and that you did not sell it, then you would have a capital gain to report on any increase in the value you sold it for over the fair value at her death. If you rented the house after she died you need to speak to an accountant to determine whether you converted it to a business/rental property. Depreciation deductions during the rental period will also affect your taxable gain.
Assume the house was never rented or used for a business or home office.
State Taxes: State's have tax rules that often differ significantly from federal tax rules. You should check with an accountant in your state to see what state tax implications are.
What might seem like a simple issue can actually be pretty complicated. Gather up your information and go talk to a good local CPA.