Most home sellers are very excited on closing day. They anticipate seeing a very large check, usually the largest check they will see for any type of possession or investment they have sold. But, come the following April 15th, their accountant will be asking whether there are any taxes that must be paid on the profit.

When the 1997 Tax Act passed, the home sale rules were completely changed. Many home sales that were not taxed under the old law may now be subject to tax. But many more people who might have paid taxes on the profits of their home sale under the old rules do not pay anything under the current law.

There are three tests to meet in order to have the profits from your home sale excluded from income taxes:

1. Use test: You must have lived in your home for any two years out of the last 5 years.
2. Ownership test: You must have used the house you sold as your principal residence for any 2 years out of the last 5 years.
3. Timing test: You must not have excluded gain from the sale of another home within the last 2 years.

If you meet all three tests, you can exclude from your taxes up to $250,000 of gain, if you are single, or up to $500,000 of gain, if you are married, filing jointly. If only 1 spouse meets the Ownership test, the full exclusion is allowed, as long as both spouses meet the Use test. Or if 1 spouse has done a tax-free sale within the last 2 years, the other spouse may sell and exclude $250,000 of gain. If 2 non-married persons own a house together and both live there, each can exclude up to $250,000 of gain. Even if you don