If you’re a single taxpayer, you can exclude up to $250,000 worth of capital gains on a sale of your home. Suppose Jack Wilson bought a house years ago for $50,000. He sells it this year for $200,000. He has a $150,000 gain ($200,000 minus his $50,000 basis), which is covered by his $250,000 exclusion, so he owes no tax.
Married couples filing a joint tax return can get a $500,000 tax exemption. If Larry and Mary Johnson bought a house for $100,000 years ago and sell it for $650,000 in 2008, their gain is $550,000. Of that $550,000, $500,000 is tax-free because of the exclusion while the excess $50,000 is taxed as a long-term capital gain, at a 15 percent rate.
In order to qualify for these exclusions you must have owned the home and used it as your principal residence for at least two of the five years prior to the date of sale. You can’t defer the taxable gain on a home sale, as you could under prior law. If you sell a house for a profit, your only tax shelters are the $250,000 and $500,000 exclusions.