Question 30

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

To qualify for the capital gains tax exclusion, it is essential that the couple has owned and lived in their principal residence for a minimum of two years within the last five-year period prior to the sale.

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

This option is incorrect because the age of the sellers does not affect the eligibility for the capital gains tax exclusion. The requirement is based on ownership and occupancy duration, not age.

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

This option is incorrect as it misrepresents the requirements for the capital gains exclusion. While there are rules regarding reinvestment in a new home, they do not apply to the federal capital gains exclusion for primary residences.

C) neither has ever used the Homesellers Exclusion in the past.

This option is incorrect because the ability to use the capital gains exclusion is not contingent on past usage. As long as the couple meets the ownership and occupancy requirements, they can claim the exclusion regardless of prior usage.

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

This option is correct because it directly aligns with the IRS requirements for the capital gains tax exclusion. The couple must have owned and used the home as their principal residence for at least two years to qualify for the exclusion.

Conclusion

The correct answer is definitively D, as it directly addresses the ownership and occupancy requirement necessary for the capital gains tax exclusion. Options A, B, and C fail to reflect the actual criteria set forth by the IRS, which focuses on the length of time the home has been owned and occupied rather than the sellers' age, reinvestment in a new home, or previous exclusions.