The Taxpayer Relief Act of 1997 gave homeowners selling their houses a big tax break. If you sell your house , $250,000 of the capital gains can be excluded from tax. If a married couple files separately they, each get to enjoy an exclusion of $250,000 of the capital gain. But when couples file jointly, the exclusion can be $500,000 in the profit on the sale of their home.

For example:
1. John and Nerise sold their primary residence for a profit of $300,000. Since the profit was less than $500,000, they pay no tax on the home sale.
2. Bill and Lindsay sold their primary residence for a profit of $600,000. With this, $100,000 will be subjected to the capital gains tax.

There is a condition on the exclusion. The homeowner should have owned and lived in the house for an aggregate of at least two of five years before the sale. This rule is called the “ownership” and “use” test.

If the homeowner fails the test, he can still be eligible for exclusion of capital gains. But he can apply only for “partial exclusions”. This can be done when there is a change in the seller’s employment or health or other unforeseen circumstances. The rate of exclusion is based on the period the seller lived in the house. To calculate, take the number of months you lived there before the sale and divide it by 24.

For example, if the seller of the house is an unmarried taxpayer and resides in the house for 12 months, and then sells it for a $125,000 profit, the entire amount would be excluded because the seller lived in the house half of the two-year period. (12/24 x $250,000 = $125,000.) The period the taxpayer resided in the house is enough to exempt his entire $125,000 profit.

So when you sell your house , don’t forget the Taxpayer Relief Act of 1997 where you can get some tax breaks.