Registered Tax Return Preparer RTRP Practice Exam 2025 - Free Tax Return Preparation Practice Questions and Study Guide

When selling a primary residence, the tax consequence often involves a capital gain exclusion that can significantly reduce or eliminate taxes on the gain from the sale, provided certain requirements are met. The Internal Revenue Code allows homeowners to exclude up to $250,000 of capital gains from the sale of their primary residence for single filers and up to $500,000 for married couples filing jointly. To qualify for this exclusion, the seller must have owned and lived in the home for at least two of the five years prior to the sale.

This exclusion makes it especially advantageous for homeowners, as it creates the potential for significant tax savings when they sell their home. It encourages home ownership and investment in real estate by mitigating the tax burden associated with the appreciation in property values over time.

Other options do not accurately reflect the tax implications of selling a primary residence. For example, suggesting that a tax penalty applies to all home sales is misleading, as the exclusion effectively eliminates taxes on gains for qualifying homeowners. The idea that all sales are considered taxable income is overly broad, as it does not account for the capital gains exclusion. Similarly, stating that there are no tax implications ignores the potential benefits and requirements of the capital gains exclusion that could apply to many homeowners.