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