When selling a home, a couple can profit up to $500,000 on the sale of the home tax-free over a five-year period. This is a rolling benefit over a five-year period, which means that if you profit $250,000 on the sale of a home you have lived in for 3 years and another $250,000 on a home you’ve lived in for the next two years, you have used all of your benefit for that five-year period. The property does need to be the principal residence. In order to get the maximum benefit, you need to live in each home for a minimum of two years, however, the amount can be pro-rated if you need to sell your home in less than two years following the purchase. There may be many reasons for this such as a new job requiring you to move or relocate.
The amount for a single person is $250,000 and again if you need to sell and move before the two year period from sale is up the benefit may be prorated e.g. if you need to move after six months a couple can profit $125,000 tax-free and a single person can profit $62,500. You only need to report on a gain to the IRS once you have reached the cap over the five year period and this can be reported on IRS Form 1040 Schedule D. For more information on selling a home and the tax implications see IRS publication 523. http://www.irs.gov/pub/irs-pdf/p523.pdf
Use this link IRS to access IRS information and forms. See also our real estate article on 1031 Tax Deferred Exchanges.