Final answer:
Bob and Mary can likely exclude the entire $486,000 gain from taxation when selling their principal residence, assuming they meet necessary qualifications such as owning and residing in the home for at least two of the last five years. The exclusion amount for married filing jointly is up to $500,000.
Step-by-step explanation:
If Bob and Mary sell their principal residence after residing in it for 16 years and gain $486,000 on the sale, they may be entitled to exclude at least a portion of that gain from taxation. Under the United States tax law, individuals can exclude up to $250,000 of capital gains from the sale of a principal residence if they have owned and used it as their main home for at least two out of the last five years before the sale.
For married couples filing jointly, this exclusion amount is doubled to $500,000. Therefore, Bob and Mary should be able to exclude the entire $486,000 from their taxable income provided they meet these qualifications and have no disqualifying factors.
It's important to note that specific conditions and rules apply to this exclusion, such as the need to report the sale on Form 1040, Schedule D if necessary, and limitations on frequency of use. Consulting with a tax professional is recommended to ensure compliance with all tax laws and to receive guidance on any potential state taxes.