Simple ... first the original cost to build + improvements along the way = 200K ... 100K basis per person.
Next the value as of date of death ... say it was 400K at that time ( $200 each) ... spouse gets a step up basis for the decedent's half ... so now the basis for the home is $200K + $100K = $300K
Last ... sell for $525K - ($300K basis + closing costs) = $225 profit that can be fully excluded
If she gets a 1099-S for the sale then it must be reported on the return however the personal exclusion will negate any taxes.
