Your home not only shelters you from the weather and from intruders, it can serve as a powerful tax shelter. Here’s one way: Married couples filing jointly can exclude up to $500,000 worth of gains on home sales; for individuals, the limit is $250,000. (Suppose you and your spouse bought a house years ago for $200,000 and ultimately sell it for $600,000. That’s a $400,000 gain yet you’ll owe not a penny to Uncle Sam.)
With a tax break this generous, you should pay attention to the rules. Suppose, for example, you intend to get married; both you and your spouse own homes so you plan to sell one. If the house you’d sell has appreciated more than $250,000 you may want to wait until after the marriage to sell, in order to get the $500,000 exclusion.
This exclusion is not a once-in-a-lifetime tax break. That is, you can use the $250,000 or $500,000 exclusion once every two years, no matter what your age. The requirements are that you must have owned and occupied your home as a principal residence for at least two out of the five years prior to the sale. You might sell an appreciated primary residence, pocket tax-free proceeds, and move into what had been a vacation home. After living there for two years you can sell this home, too, and claim an exclusion.