Yes, your understanding is correct as long as she did not remarry.
If that is the case (she sold within 2 years and had not remarried) you can enter the stepped-up value as the "Adjusted Cost Basis" of the home and continue to see if the program then gives her the full 500,000.
On the "Home purchase info" screen select
"Yes, I will enter the amount"
Do not use "No, I would like some help top calculate it"
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