Low income individuals do escape from paying capital gains tax but she will not be a low-income person in the year she sells this property.
Also note that this property does not qualify as her personal residence because she has not lived in it for 2 out of the past 5 years. However, if she were to move back into it for 2 years she would get a $250,000 exemption. But she would still have to pay tax at a 25 percent rate (plus the state income tax) on the depreciation she has taken while the property was rented out.
Yes, she definitely has a problem if she sells the property. I she keeps it her heirs would inherit it at a stepped-up cost basis and would avoid paying any federal and state taxes.
