Adjusted cost basis of residence = Cost of purchase + Cost of any capital improvements

= $100,000 + $125,000

= $225,000

Sale proceeds from sale on June 15,2019 = $800,000

Capital gain = $800,000 - $225,000

= $575,000

As per IRS Publication 523, Section 121 exclusion test, if following eligibility test is met then taxpayer may exclude upto $250,000 from taxable gain ($500,000 for married filing jointly taxpayers):

1. The taxpayer must have owned and lived in the house for at least 2 years in the five years prior to sale. This condition is met as the house was sold on June 15,2019 and the taxpayers lived in the house till July 1,2016.

2. The taxpayers must not have excluded a gain from sale of another home. This condition is also met.

Therefore, out of $575,000 capital gain, $500,000 can be excluded by Joe and Jean since they are filing married filing jointly status.

The taxable gain will,therefore,be $575,000 - $500,000 = $75,000

Therefore,correct option is B. $75,000