A married couple buys a home for $130,000 in 2001. In 2017, they sell it for $290,000. How much capital gains tax will they pay on the gain?

A married couple buys a home for $130,000 in 2001. In 2017, they sell it for $290,000. How much capital gains tax will they pay on the gain?

• A. $160,000
• B. $80,000
• C. $0
• D. $40,000

Answer: (C)

The main concept here is the home sale exclusion for a primary residence. When you own and live in a home as your main residence for at least 2 of the last 5 years, you can exclude a substantial amount of the gain from capital gains tax. For married couples filing jointly, the exclusion is up to 500,000. In this scenario, the couple bought for 130,000 and sold for 290,000, so the gain is 160,000. They have lived in the home for many years, meeting the requirement. Since 160,000 is well below the 500,000 exclusion, the entire gain can be excluded from taxable income. Therefore, no capital gains tax is owed on this sale. If they hadn’t met the primary residence requirements (or if they were not a married couple filing jointly), some portion of the gain could be taxable, but with the given facts, the tax due on the gain is zero.

The main concept here is the home sale exclusion for a primary residence. When you own and live in a home as your main residence for at least 2 of the last 5 years, you can exclude a substantial amount of the gain from capital gains tax. For married couples filing jointly, the exclusion is up to 500,000.

In this scenario, the couple bought for 130,000 and sold for 290,000, so the gain is 160,000. They have lived in the home for many years, meeting the requirement. Since 160,000 is well below the 500,000 exclusion, the entire gain can be excluded from taxable income. Therefore, no capital gains tax is owed on this sale.

If they hadn’t met the primary residence requirements (or if they were not a married couple filing jointly), some portion of the gain could be taxable, but with the given facts, the tax due on the gain is zero.