Anyone who owns and lives in his or her principal residence for at least two out of the five years prior to selling the house can exclude up to $250,000 of profit from capital gains taxes when that house is sold. If you are married and file a joint return, then you can exclude up to $500,000 of profit.

If you are widowed, as a surviving spouse you can take the more generous $500,000 profit exclusion (rather than $250,000) if you sell your house within two years of your spouse's death.

This widow ruling went into effect in 2008. Prior to that, the $500,000 exclusion was available to a surviving spouse only if the house was sold in the year that a joint tax return was filed -- in other words, during the year of the spouse's death.

Some points to keep in mind...

• The time periods for living in your house (2 years out of the last 5) need not be consecutive as long as they add up to two years.
• You may use the exclusion again in the future, but not more often than every two years.
• The two-year rule is waived if you must sell your home before living in it for two years because a new job requires you to move or if you move for an IRS-approved health reason. This can be due to your own illness or the illness of someone in your immediate family.
• The two-year rule is also waived if you move for "unforeseen circumstances" which the IRS lists as:
• Becoming eligible for unemployment insurance
• Unable to pay your mortgag
• Damage to your home from a natural or man-made disaste
• Death
• Divorce or legal separation

Making a large profit...

If you wind up having a profit that exceeds the $250,000 or $500,000 exclusion, then you must report the sale on IRS Schedule D, "Capital Gains & Losses" which you attach to your 1040. In this case, it's usually wise to consult an accountant.

On the other hand, if you're good with numbers and have also kept clear records (your original cost and the cost of qualified improvements made to the house), you may have no difficulty completing Schedule D yourself.

To compute your profit, you subtract the following from the sales price: advertising costs, attorney fees, real estate broker's commission and title closing costs.

From this dollar amount, then subtract: the original cost of the house, cost of improvements and both closing costs and attorney fees from when you purchased the house.

For further information...

This being an IRS matter, it won't shock you to know that there are many other little rules and requirements. You'll find them covered in two publications. The first is Tax Topics #701, Sale of Your Home, available from the TeleTax Information Hot Line at: 800-829-4477 or at: www.irs.gov. Note: If you use the Hot Line, the information is automatically read to you and by pressing "9" on your telephone keypad, you can go back and have sections repeated as many times as you wish.

The second item is Publication #523, Selling Your Home. Download a copy at: www.irs.gov or call the IRS at: 800-829-3676 and ask for one to be mailed to you.