Final answer:
Mary can exclude up to $250,000 of capital gain if the residence was her principal residence for two of the five years preceding the sale, according to Section 121 exclusion. Other options mentioned, such as owning a vacation home or the timing of previous home sales, do not directly disqualify her from this exclusion.
Step-by-step explanation:
Mary, a single individual, may exclude up to $250,000 of capital gain on the sale of her residence if the residence was her principal residence for two of the preceding five years. This is known as the Section 121 exclusion and it allows for the exclusion of capital gains from the sale of a principal residence, with certain conditions. To be eligible for this exclusion, the taxpayer must have owned and used the home as their principal residence for at least two years out of the last five years prior to the sale.
It's irrelevant whether Mary has a second residence as a vacation home or not, as long as the sold residence meets the criteria. Additionally, the restriction concerning not having sold another residence within the past five years relates to the frequency of using the exclusion, not the eligibility for a single sale.
Understanding the implications of housing prices and equity is essential when considering the tax implications of selling a house. For example, Freda's house increased in value which gives her equity of the full current market value, while Ben's equity is the current market value minus what he still owes on the bank loan. Housing markets can fluctuate, impacting capital gains and requiring a careful assessment when planning around the exclusion.