Has the grandmother lived in the house within the last 5 years? If not, as the house is financed in the grandmother's name, and she does not live there, she will not meet the test to exclude part of the sales price. The IRS has specific requirements that must be met in order to exclude part of the sale price. As your son is not the owner, though he has lived there, he does not meet the ownership test, therefore the exclusion will not apply to him. SEE BELOW:
Eligibility Step 2—Ownership
Determine whether you meet the ownership requirement. If you owned the home for at least 24 months (2
years) during the last 5 years leading up to the date of sale (date of the closing), you meet the ownership requirement. If you received Form 1099-S, Proceeds From Real
Estate Transactions, the date of sale appears in box 1 of Form 1099-S. If you did not receive Form 1099-S,
the date of sale is either the date the title transferred or the date the economic burdens and benefits of ownership shifted to the buyer, whichever date is earlier. (In most cases, these dates are the same.)
Eligibility Step 3—Residence
Determine whether you meet the residence requirement.
If your home was your residence for at least 24 of
the months you owned the home during the 5 years leading up to the date of sale, you meet the residence require-
ment. The 24 months of residence can fall anywhere within the 5-year period. It doesn't even have to be a single block of time. All you need is a total of 24 months (730 days) of residence during the 5-year period.
IRS Pub 523
Let me know if I can be of further assistance to you regarding this matter.