In Minnesota, I inherited a home in 2009, then sold it in 2011 for 150,000 (less than market value and less than its worth in 2009.
The more important thing is the value at the time you inherited the home. You likely received a stepped-up basis in the home which equals the fair market value at the time you received it. So in essence, you will recognize gain or loss based on the 2009 value. It sounds like you will have a loss. even if you have a gain, if it is a primary residence that you have lived in for two years, you can exclude up to $250,000 in gain, but that doesn't sound applicable to you if the value has decreased in the time you had it.
Mr. Larson is 100% correct. Make sure you have a record of the value (tax basis) at the time of the deceased person's death and a record of how much it sold for and then go see an experienced accountant.
This is not legal advice nor intended to create an attorney-client relationship. The information provided here is informational in nature only. This attorney may not be licensed in the jurisdiction which you have a question about so the answer could be only general in nature. Visit Steve Zelinger's website: http://www.stevenzelinger.com/
If the estate was probated (it should have been) then the date of death value should be in the probate records. If an estate tax form was prepared, it would be there too. If you have 100% valuation, the IRS would probably accept the property tax assessment. If they don't and you are audited, you might have to have a retrospective appraisal performed, probably $300 to $500.
Why did you sell it for less than market value? The IRS could find that you need to report the sale at its true market value if it was a less than arms lenth transaction. Don't forget to deduct from the sale price or add to the acquisition value (basis) any improvements you made, costs of sale including brokerage, etc.