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Because of changes to the tax laws that went into effect in May of 1997, many homeowners will be exempt from paying tax on gains from the sale of their main home.
More specifically, you may be able to exclude up to $250,000 in gains when you sell your home, provided that you have both owned and used your home as a principal residence for at least two of the five years immediately preceding the sale (five years minimum ownership for sales and exchanges after October 22, 2004, if the residence was acquired in a like-kind exchange).
Married couples can exclude up to $500,000 in gains if they file a joint return, provided that both spouses meet the two-year use test, at least one spouse can meet the two-year ownership test, and neither spouse has excluded gain from the sale of another home in the last two years (counting sales since May 6, 1997).
To take advantage of this exclusion, you need to know:
As a reminder, losses on the sale of your personal residence are not deductible. There is an exception to this rule if part of your home was rented out or used for a home office, or your home was converted to a rental property before you sold it. In any case, only losses on the business portion of the home would be deductible. Also see our discussion of sales of rental or commercial real estate.