@dfs49 -
1) The IRS residency requirement is: "If you owned the home and used it as your residence for at least 24 months of the previous 5 years, you meet the residence requirement.
Note the 'and' in the statement above, To pass the test your wife must have BOTH lived there for 24 months AND owned it for 24 months. Since your wife did not own the home for 2 years, the residency test is not satisified, hence you two are not elgiible for the full exclusion
2) the decision to sell MAY not meet the IRS requirements for a partial exclusion either. DId you read the IRS link above? You mother in law was not a resident of the home subsequent to your wife becoming the owner, so not confident you can meet the test to get the partial exclusion. What was the motivation to sell the home?
A doctor recommended a change in residence for you because you were experiencing a health problem.
The above is true of your spouse, a co-owner of the home, or anyone else for whom the home was his or her residence.
3) what Medicare permits and what the IRS permits are not the same.
4) a Local Tax CPA might be in order.
