Married couples filing jointly can exclude up to $500,000 of net profit on the sale
of a primary home from taxes. For single filers, the exemption is $250,000.
For example, say that a married couple bought a home many years ago for
$100,000 and later made $100,000 of improvements. This year, they sell the home
for $600,000. The gain, or profit, on the sale is $400,000. All of it would be exempt from capital gains tax due to their $500,000 exemption.
To be eligible for this benefit, the homeowner typically must have used the house
as a primary residence for two of the previous five years. In general, taxpayers
aren’t eligible for the full exemption if they excluded the gain from the sale of
another home during the two years before the sale.
Surviving widows and widowers have until two years after the spouse’s date of
death to sell and qualify for the $500,000 exemption rather than a $250,000
benefit, as long as the survivor hasn’t remarried. The survivor will also likely get
a “step-up” in cost basis on half of the home’s value (in most states) or all of the
home’s value (in community-property states). This will lower capital-gains taxes
on the home sale, if any are owed.