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In 2013, Katherine and Dave sold a house to Alexander for $1,200,000. Prior the 2013 sale, neither Katherine nor Dave had ever excluded a gain from the sale of a personal residence. Katherine and Dave had lived in the house for the last five years and used it exclusively for personal purposes. Katherine and Dave had purchased the house for $500,000. Katherine and Dave started living in the house immediately after purchasing it and never made any capital improvements to the house or took any depreciation (or other deductions) against it. Assume there were no selling expenses. How much of a gain did Katherine and Dave realize on the sale to Alexander (assume that Katherine and Dave are married and file a joint return)?

a. $0

b. $200,000

c. $700,000

d. $1,200,000

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