If the plan is to sell the home, then pay off the mortgage, you shouldn't run into any issues with Section 988. Refinancing the mortgage first would be more likely to trigger a foreign currency gain rather than less likely, so I wouldn't advise that strategy.
A mortgage refinance can cause a Section 988 gain, but the sale of a main home doesn't. Foreign currency gains/losses aren't added to the gain (or loss) of the sale of a primary residence.
The proper way to calculate the gain/loss with the currency exchange is pretty straightforward for the most part (for taxes, anyway!)
You will convert the purchase price to USD using the prevailing exchange rate at the time of the purchase. You will do the same with the sale price and any expenses related to the sale on the date of the sale as well.
Similarly, you will convert improvements to USD on the date those improvements were made.
Since it's the sale of her primary residence, you are also entitled to exclude gain per those rules if qualified.
The source of my information primarily comes from the 1996 court case Carlos J. Quijano and Jean M. Quijano, Appellants, v. United States of America, Appellee, 93 F.3d 26.... In this case, the Appellants tried to amend their return to reduce their gain by applying Section 988, and the court agreed with the IRS that it doesn't apply for the sale of a primary residence. That's the VERY brief summary - but I include a link for your reference so that you can review it, should you wish to do so.
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