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I am married and should qualify for the joint 500k exemption for primary residences. Assuming a 100k/year income, my question is if the IRS will consider our income to be 300k or 800k for the year? Thank you in advance

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You have a $700K cap gain. $500K exclusion. So you're left with a $200K long term cap gain.

  • I think the question as to whether that gain would be included in Income. – D Stanley Mar 1 '17 at 21:52
  • Cap gains are taxed differently, they are not ordinary income. Not as simple as saying taxed on $300 vs $800. – JoeTaxpayer Mar 1 '17 at 21:53
  • Buy they are included in AGI, correct? – D Stanley Mar 1 '17 at 21:53
  • Yes, it works its way to that line. – JoeTaxpayer Mar 1 '17 at 21:54
  • @DStanley - I was avoiding the tangent of earned income vs other income. Each is taxed differently, and has other impact to one's full return. The question itself was almost a yes/no question, and the answer is that if OP lived there for 2 of the last 5 years, he got the $500K exclusion correct, and will only show the $200K gain. If you feel there's something else I should clarify in my answer, I'm happy to do so. I went for brevity, and have a basic one line answer. – JoeTaxpayer Mar 3 '17 at 13:52
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The gain is sale price - cost basis.

Up to 500k of the gain is excludable. IRS Topic 701 - Sale of your Home. Links from there explain cost basis and rules for the exclusion and explanation of gains and losses.

The non-excludable part will be taxed according to the duration of the investment. It will be taxed as a capital gain.

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