re: Capital Gains at Death

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basis can actually be negative

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Basis can never go below zero.

As for the example you gave... think about economically.

There can only be a few reasons I can think of to have that big of a difference between debt and basis:

1) At least one 1031 exchange has occured, in which case, the taxpayer upon sale is really recognizing the gain on more than one property

2) A relatively recent loan was taken against the property, maybe in a refinance, and the proceeds were not capitalized back in the property, and instead where used on other property.

3) Same as two, but instead of using it on another property, it was used on the subject property, but ordinary expense deductions were taken (maybe a bunch of repairs written off).

The owner may be coming out of pocket to pay the tax, but the owner has enjoyed greater tax deductions over the years. Truly, the time to pay the piper has come.