Sale of principal residence. Lupe and Gavin, who are married and file jointly, bought a house on January 1, 2012, for $450,000. They used it as a vacation home until January 1, 2016, when they moved into it and used it as their principal residence. (They did not take any depreciation deductions during the time it was a vacation home.) On January 1, 2020, they sold it for $890,000. How much capital gain do they have to report on this sale?

To determine the capital gain that Lupe and Gavin must report on the sale of their house, we need to calculate the difference between the selling price and the purchase price, and then consider any applicable exclusions. Sale price: $890,000 Purchase price: $450,000 Capital gain before exclusion: $890,000 - $450,000 = $440,000 The IRS allows individuals to exclude up to $250,000 of capital gains on the sale of a principal residence if they meet the ownership and use tests, which require that the individual has owned and used the home as their principal residence for at least two out of the five years prior to the sale. Married couples filing jointly can exclude up to $500,000 of capital gains if both spouses meet the use test and at least one spouse meets the ownership test. Lupe and Gavin owned the house from January 1, 2012, to January 1, 2020, which is eight years. They used it as a vacation home for the first four years and then as their principal residence for the next four years. Since they meet the ownership and use tests (they owned the home for more than two years and used it as their principal residence for at least two out of the five years before the sale), they are eligible for the $500,000 exclusion. Because the exclusion amount is greater than the capital gain, they can exclude the entire gain of $440,000. Capital gain to report

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