No. The wife would not have a stepped up basis for half of the home when her husband died (on his date of death), because of the installation of the life estate for both her and the husband. Her cost basis would be 100% of the actual cost of the home, including improvements capital in nature that increased the value of the home. In other words, no repairs expense would ever be added to the cost basis.
When the wife went to the assisted living facility, and then the children sold the home, they would use the mothers basis at the time of sale. The difference between basis plus selling expenses and the selling price will be capital gain. The sale should go on the return of the mother if she was still the owner on the deed. This could eliminate any taxable capital gain depending on the amount of the gain and whether she is eligible for the home sale exclusion.
If she gave the proceeds of the sale to the children and if the amount per child is less than $15,000 or potentially $30,000 if for example there was a gift to the daughter and the son-in-law. Nothing would have to be filed, however if the gift was greater than the limits mentioned then the wife may be required to file a gift tax return.
The key to the answer here is based on the fact that the wife's name was not removed from the deed. Please update if you need additional clarification.
Thank you for the reminder @tagteam
@dwally See the update in paragraph 1.
[Edited: 01/20/2022 | 12:20p PST]
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