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Before Congress passed the Taxpayer Relief Act of 1997, you basically had two choices when you made money on the sale of your house: Pay significant capital gains taxes on the profits, or buy a house of greater value within two years. Only if you were over 55 could you exclude a certain amount of profit — and then, only once in your life.

No more. Now virtually all sellers (except those at the highest end of the market) can keep any profits they make on the sale of a house with negligible tax consequences — making homeownership a potentially lucrative long-term savings vehicle.

For home sellers, capital gain is the difference between what you paid for a house and what you sell it for, minus the cost of any capital improvements. Capital improvements are home improvements that change the structure or livability of your home, such as an added room or remodeled kitchen. Today's tax rules allow the following:

Married couples or co-owners who file taxes jointly may keep $500,000 in profits tax-free on the sale of a home they have owned and lived in for two of the past five years. Anything above that amount is taxed at 20 percent.

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Single homeowners
may keep $250,000 in profits tax-free on the sale of a home they have owned and lived in for two of the past five years. Anything above that amount is taxed at 20 percent.

Rental property owners may defer some capital gains tax if they purchase another rental property and qualify for a 1031 exchange, but not if they buy a personal residence.

Essentially, you are free to sell a residence every two years and pocket the profits.
If you own and occupy your house for less than two years before you sell, you can still qualify for a prorated exclusion from capital gains tax if you are selling because of a job transfer or health problems. The IRS and Congress are continually refining these rules, however. It is best to check with your tax adviser.

TIP: The time-limit requirement is looser for members of the military, Foreign Service and other government agency personnel on overseas assignments, and for private industry employees sent overseas by their companies. For more information, consult your tax advisor.