Final answer:
Sarah is eligible for the Section 121 exclusion for the capital gain from her home sale. However, due to the period when the home was used as a vacation residence, specific calculations are needed to determine the exact amount that can be excluded. It's recommended she consult a tax professional for detailed advice.
Step-by-step explanation:
The question asks about the potential capital gains tax implications for Sarah, who has sold her home for a profit. In the scenario provided, Sarah used the house as her principal residence until December 31, 2019, before converting it into a vacation home until the sale on January 1, 2023.
Sarah is eligible for the Section 121 exclusion because she used the house as her main home for at least 2 out of the 5 years preceding the sale. As of 2023, the exclusion would allow her to exclude up to $250,000 of the gain as a single filer, since she meets the ownership and use test. However, because she used it as a vacation home for three years before the sale, there may be different rules that apply, potentially affecting the excludable amount. In this case, a proportional amount of gain related to non-qualified use (vacation period) may not be eligible for the exclusion.
Therefore, without additional information regarding the proportion of nonqualified use or specific changes to tax law after the knowledge cutoff, it is not possible to calculate the exact amount of the gain Sarah would recognize. Sarah should consult a tax professional to determine the precise tax implications based on the cumulative duration of qualified use as her principal residence, non-qualified use, and any temporary or proposed regulations, or changes in the tax law.