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How to calculate taxable gain on the sale of a principle residence?

In order for the home to qualify as the principle residence, the taxpayer must meet the 2 out of 5 year test. Basically, this test assess whether or not the taxpayer lives in the home as the primary residence for 2 of the last 5 years leading up to the sale.

Assuming the taxpayer meets the 2 out of 5-year test, then the taxpayer is entitled to certain exclusion exemption amounts. If the taxpayer is single, up to $250,000 of the gain can be excluded. If the taxpayer is married, then up to $500,000 of the gain can be excluded.

For example, if Mary-Beth, a single paying taxpayer sold her principal residence in June of Year 7, for $1,000,000 after it significantly appreciated in value. She had purchased her home in January of Year 1, for $300,000. The realized gain would be $700,000 based on the sales price of $1,000,000 and a basis (original purchase price) of $30,0000. However, since Marybeth is “single”, she can exclude $250,000 of the gain, which brings the recognized gain to $450,000.


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