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If your wife received form 1099-S, it needs to be reported on TurboTax. TurboTax reports the $40,000 capital gain, however the tax should be excluded or $0.00 since this was her personal residence and she qualifies for the personal residence sale exemption. 

Make sure you go to the end of the TurboTax interview for the sale of the home. I recreated your tax situation and the gain was excluded. 

To quickly get to that section of TurboTax:

1. Open or continue your return in TurboTax.
2. Search for home sale.
3. Select the Jump to link in the search results.
4. Answer Yes to Did you sell or have your home foreclosed in 2019? on the Sale of Your Main Home screen.
5. Follow the instructions to enter your info.

Related Information:

• I sold my home at a loss. Is this deductible?
• Can I claim property (real estate) taxes if I recently bought or sold my home?
• Where do I enter the sale of a second home, an inherited home, or land on my 2019 taxes?