I see that folks need to keep up to date on this ever moving target. The widow/widower has two years from the date of the spouse's death to retain the $500,000 exemption. After 2 years they revert to the $250,000 level. This is a new law and understandable why many are not aware of it - JD
You can claim $250k per single/divorced/widowed and $500k per married couple for capital gains exemption. A way to protect clients in this situation is to team up with an attorney who specialized in estate planning. My attorney sets clients up in AB Trusts. You should look into it or I can refer you to my specialist. Hope this helps!
Double check, but I believe that if the sale occurs within the same calender year (i.e. death 2007 and sale in 2007) he would be able to get the full $500K exemption. Otherwise he would have to use the stepped up method. The value of the home at time of death of the spouse becomes the base price (not original purchase price) for which you figure the capital gain.