As you pointed out they get the 500K exclusion if they sell, so they don’t pay tax on the full sale price. In addition, the cost they paid for the home initially plus any capital improvements costs are subtracted from the selling price. You are correct also that an inherited home would not be taxed to the beneficiaries. Your parents have to decide if they want to keep the house and be landlords until they die or just get rid of it. Do they need the income from the sale to pay for assisted living, etc. So your the answer depends on more than tax issues.
