You have not lived in a home for at least two years of the five years prior to the sale, so you must report the sale and pay any capital gains tax. Your capital gains is the difference between your selling price and your adjusted cost basis. The amount you borrowed or the amount of outstanding loan has nothing to do with your capital gains.
Your starting cost basis is the fair market value of the home on the day your mother died. You must then reduce your cost basis by any depreciation that you took or could have taken while the home was a rental.
For example, we might assume that the home was worth $100,000 in 2016 and is worth $167,000 in 2021. You took or should have taken about $5000 of depreciation if you rented a home for two years, so your adjusted cost basis would be $95,000. If you sell the home for more than the adjusted cost basis, the difference is a taxable capital gain that you must report. If you are selling for less then the adjusted cost basis, you have a capital loss. A capital loss cannot be deducted on personal property, but it can be deducted from business property. It’s not clear if this is personal or business property, especially if it was only occasionally rented out. If the $95,000 sale price represents a loss (after considering the value on the date of your mothers death and any adjustments) you would need to consult a professional tax advisor to determine if that loss was deductible.
Then separately, you are also making a gift of equity to the buyer. If the home is worth $167,000 and you are selling it for $95,000, then you are giving the buyer equity worth $72,000. This must be reported as a gift on a gift tax return form 709. Gift tax is not actually required to be paid unless your lifetime gifts are more than $11 million, but you must report gifts over $15,000 so that the IRS can track them against your lifetime limit.
The value that the house is listed on the tax assessment rolls has nothing to do with anything else in this situation. Tax assessments are often not at fair market value. Fair market value is determined by what a willing buyer will pay a willing seller in a sale that is not forced. Fair market value can be estimated by a property appraisal.
