The “Mortgage Forgiveness Debt Relief Act of 2007” allows a surviving spouse to exclude from gross income up to $500,000 of the gain from the sale or exchange of a principal residence owned jointly with a deceased spouse if the sale or exchange occurs within two years of the death of the spouse and other ownership and use requirements have been met. (effective Dec 31, 2007)

For actual text see sec. 7(a)

If you include the step up in basis, this means a house with a million dollars in capital gains could be sold by the surviving spouse tax free (e.g., $500K step up and $500K exclusion).