TaxGuyBill
Level 15

It sounds to me that it is a partial interest sale.  

If that is the case, that means they do qualify for the exclusion, BUT when they sell the rest of the house their exclusion will be reduced by the amount they claimed for this sale of the partial interest.

See Reg 1.121-4(e).

https://www.law.cornell.edu/cfr/text/26/1.121-4