Senior Tax Specialist Practice Test Prep: Practice Questions and Study Guide

The gain from selling a principal residence is classified as a long-term capital gain because the home was owned for more than one year. When Alec sells his home for $205,000, having purchased it for $175,000, he realizes a gain of $30,000. Since the property is considered a capital asset, the gain is categorized as a capital gain.

Moreover, under the tax code, gains on the sale of a principal residence can also qualify for exclusions, such as the $250,000 exclusion for single taxpayers, meaning in many situations that part of the gain may not be taxable. However, in this particular case, the focus is solely on the character and amount of the gain without considering any exclusions.

The classification as a long-term gain is significant because it influences the tax rate applied to the gain, which is generally more favorable compared to ordinary income tax rates. Consequently, the correct characterization of Alec's gain is a long-term capital gain of $30,000.