Question 38

A couple who sell their principal residence may take up to $500,000 in federal capital gains tax exclusion if they have owned and occupied the house for at least 2 of the previous 5 years.

To qualify for the $500,000 capital gains tax exclusion, the couple must have owned and lived in the home for a minimum of two years within the last five years prior to the sale.

A) at least one of them has reached the age of 65

This option is incorrect as there is no age requirement for the capital gains tax exclusion. The exclusion is based on ownership and occupancy, not the age of the homeowners.

B) they buy a replacement home of equal or greater value than the one being sold within a year

This option is also incorrect. While buying a replacement home can be beneficial for tax purposes, it is not a requirement for the capital gains exclusion. The exclusion applies regardless of whether a new home is purchased.

C) neither has ever used the Home Sellers Exclusion in the past

This option is misleading. While a couple must not have used the exclusion on another home within the last two years to qualify, it does not eliminate their eligibility based solely on prior use. They can still qualify if they meet the ownership and occupancy requirements.

D) they have owned and occupied the house for at least 2 of the previous 5 years

This is the correct answer. To benefit from the capital gains exclusion, the couple must demonstrate that they have owned and used the home as their primary residence for at least two years within the last five years before selling it.

Conclusion

The correct answer, option D, directly addresses the specific requirements for the federal capital gains tax exclusion. Options A, B, and C either misinterpret the rules or introduce unrelated criteria, making them incorrect. The focus on ownership and occupancy in option D aligns with the established guidelines for qualifying for the exclusion, affirming its correctness.