Sold home we purchased in 2005 that became a full rental in 2012. FMV in 2012 was over $100K less. Do we use the 2012 FMV as cost basis or what we paid in 2005?

Using FMV for 2012 means and added $100K on capital gains since we sold the home last year. We puchased at $360K, FMV in 2012 was $256K and we sold last year for $380K. Selling costs were $2$K, so we actually lost money based on the orignal purchase. But the FMV in 2012 makes it look like we had high capital gains we know owe taxes on. This much be wrong. Or is it? Seems unfair to be paying when we actually lost money.

What can we do? If FMV was down from original cast, does that make a difference?