Listen, the fact that they lived in a community property state is irrelevant.  [Removed]  I live in one too, and have clients in Washington.  What is relevant is that Washington has an estate tax, which is an incentive for friendly appraisers to low-ball a figure.  Was that appraisal used for a state estate tax return?  Did a low number save taxes?  Did it take into account that there were two owners, the decedent and the surviving spouse, and use that as a reason to lower the FMV?  Which do you think IRS will recognize:  A low-ball appraisal, or an actual sale within a year of death?  (Maybe subtract 10%, when property values have been increasing 5% a year.)  You still have a loss after selling expenses.  

The escrow company is issuing only one 1099-S, when the law requires them to issue two?  Did this sale occur in 2025, so the 1099-S has not yet been issued?  Or no one bothered to ask them for a corrected one?  How professional is that?  Sounds kind of conspiratorial, doesn't it?