So now we have a primary residence that goes to the surviving spouse; an adjacent lot that qualifies as part of the primary residence; and an additional parcel involving another heir (maybe a stepchild of the surviving spouse) that may or may not be that additional parcel.

I would check to make sure the appraisal covered everything, not just the primary residence on its own lot. If that was worth $1 million, and the total sale was $1.3 million, an additional parcel would explain the difference, not appreciation in less than a year after death.

If the estate isn’t closed (the tax returns haven’t been done, what else is pending?) and this is not a final return, how do you distribute capital gains to anyone, on a K-1?

I don’t know of any authority for claiming Section 121 on a 1041. All the gain came after death; the purpose of Section 121 is to exclude gains while people live in their home. I suppose you could try, and attach a Form 8275 disclosure statement.

In any case, tax is assessed on income and not on pieces of paper. The name and TIN on the incorrect 1099-S is irrelevant. The surviving spouse reports half the transaction directly on a 1040. That half qualifies for the exclusion.

Problem could have been avoided if the estate had distributed the property to the survivor before it was sold. But with other parcels and other heirs involved, maybe there was a negotiated settlement with other factors that prevented this. Messy estates often result in messy tax returns.