From IRS Publication 523
Provided By realestatenc4u.com
Excluding the Gain

You may qualify to exclude from your income all or part of the gain from the sale of your main home.  This means that,
if you qualify, you will not have to pay tax on the gain up to the limit described under Maximum Exclusion; see below. To
qualify, you must meet the ownership and use tests described later.

You can choose not to take the exclusion by including the gain from the sale in your gross income on the tax return for
the year of the sale.  This choice can be made  (or revoked) at any time before the expiration of a 3-year period
beginning on the due date of your return (not including extensions) for the year of the sale.....

Maximum Exclusion

You can exclude up to $250,000 of the gain on the sale of your main home if all of the following are true.
  • You meet the ownership test.
  • You meet the use test.
  • During the 2-year period ending on the date of the sale, you did not exclude gain from the sale of another home.

If you and another person owned the home jointly but file separate returns, each of you can exclude up to $250,000 of
gain from the sale of your interest in the home if each of you meets the three conditions just listed.

You can exclude up to $500,000 of the gain on the sale of your home if all of the following are true.
  • You are married and file a joint return for the year.
  • Either you or your spouse meets the ownership test.
  • Both you and your spouse meet the use test.
  • During the 2-year period ending on the date of the sale, neither you nor your spouse excluded gain from the
    sale of another home.

If either spouse does not satisfy all these requirements, the maximum exclusion that can be claimed by the couple is
the total of the maximum exclusions that each spouse would qualify for if not married and the amounts were figured
separately.  For this purpose, each spouse is treated as owning the property during the period that either spouse
owned the property.

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