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If somebody sell his primary residence with a profit and meet the ownership and residency test, he can exclude up to 250K of capital gains. A couple can exclude up to 500K (250 each) if they file joint return. When one of the spouses dies, the other spouse can use the full 500K exclusion for the next 2 years. After that he can only exclude 250K.
250K is not a deduction, it reduces your capital gains from the sale but not bellow 0. If, for example, your dad sales the house with 200K gain, he can exclude the entire gain but cannot use the remaining 50K to reduce his other income. Also the exclusion applies to the gain, not to the cost basis.
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