i can see a possible issue with the MFS option. if on the first home sale would they have been eligible for the max joint return exclusion of $500K even though it was not needed?
Reg 1.121-2(a)
(2) Joint owners. If taxpayers jointly own a principal residence but file separate returns, each taxpayer may exclude from gross income up to $250,000 of gain that is attributable to each taxpayer's interest in the property, if the requirements of section 121 have otherwise been met.
if yes would the spouse be deemed to have made a previous sale within 2 years thus denying her the right to take the max exclusion
one thing they didn't mention is the reason for the sale. they both might qualify for a partial exclusion if the sale is for a job change, health, or unforeseen circumstances.
I think it would be wise for them to use a professional to go through the various possibilities to produce the lowest tax. Turbotax offers return preparation by a tax pro or they could use an independent tax pro
