For many taxpayers their home is their most valuable asset. With the continuing increase in home prices, the gain realized on a sale could be significant, especially on the Westside. Provisions of the Taxpayer Relief Act of 1997 allow most to exclude from income the gain on the sale of a home without even reporting the transaction on their tax returns.
Exclusion requirements are based on the IRC section 121 allows a taxpayer to exclude up to $250,000 ($500,000 for certain taxpayers who file a joint return) of the gain from the sale (or exchange) of property owned and used as a principal residence for at least two of the five years before the sale. A taxpayer can claim the full exclusion only once every two years. A reduced exclusion is available to anyone who does not meet these requirements because of a change in place of employment, health or certain unforeseen circumstances.
If you qualify for the exclusion, you may do anything you want with the tax-free proceeds from the sale. You are not required to reinvest the money in another house. But, if you do buy another home, you can qualify for the exclusion again when you sell that house. Indeed, you can use the exclusion any number of times over your lifetime as long as you satisfy the requirements.