In the end it comes out the same but it's a matter of how IRS classifies the property. Doesn't sound like they qualify for the owner exclusion as they didn't say they moved back into the property and occupied it for the qualified period prior to the sale, it that case it is still a rental albiet vacant at the time of sale. They have different reporting requirements on capital improvements and how it's added to the basis upon the sale not to mention the expenses spaned 2 tax years.
