Does the sale of a residence for over $500K have to be reported on MFJ personal tax return even though the gain was less than $500K

Yes. If you don't client will get a matching notice and/or a proposed bill.

When 1099 was issued, report the transaction and take the exclusion.  It's somewhere in the instructions.

How would IRS know if they qualified for the exclusion unless you report it on the return?

I've seen notices asking for the tax on the gross sale amount. Prepare and report the exclusion. 

I always report whether I see a 1099-S or not.  I tell client why take the chance of getting an IRS notice (I call them "love letters") in future over something that has no tax consequence to you. 

Proactive - not reactive.

From Pub 523 (create a database of useful pubs)

Reporting Gain or Loss on Your Home Sale

Determine whether you need to report the gain from
your home. You need to report the gain if ANY of the following is true.

• You have taxable gain on your home sale (or on the residential portion of your property if you made separate calculations for home and business) and don’t qualify to exclude all of the gain.

• You received a Form 1099-S. If so, you must report the sale on Form 8949 even if you have no taxable gain to report. See Instructions for Form 8949 and Instructions for Schedule D (Form 1040) for more details.

• You wish to report your gain as a taxable gain even though some or all of it is eligible for exclusion. You may wish to do this if, for example, you plan to sell another main home within the next 2 years and are likely to receive a larger gain from the sale of that property. If you choose to report, rather than exclude, your taxable gain, you can undo that choice by filing an amended return within 3 years of the due date of your return for the year of the sale, excluding extensions.

If NONE of the three bullets above is true, you don’t need to report your home sale on your tax return.