250k - single - owner occupant - at least 2 years
500k - married - owner occupant - at least 2 years
Up to these amounts in CAPITAL GAIN. So after you adjust for your basis in the property then you have what's left over in CAPITAL GAIN. This is what you would pay taxes on via a "Capital gains tax".
Example:
$100,000 purchase price
$3500 closing cost fees that are deductible
Basis after closing $103,500
Capital Gain Improvements:
Driveway $5000
In Ground Pool $10,000
Vinyl Siding $10,000
New Windows $5000
Miscellaneous upgrades $5000
Basis in property $138,500
Sale price after 3.5 years of living in the property as an owner occupant - $200,000
200,000 - 138,500 = $61,500
The $61,500 you would pay cap gains taxes on - not just the original purchase price of 100k - you add on to the BASIS over the years. HOWEVER - you've lived in the house for 3.5 years and because of the fact that you've been an owner occupant and lived in the premises for over 2 years - you're allowed up to $250,000 in capital gains - SO - you pay ZIPPO in cap gains in this example.
I'm not sure if there is a income limit on this exemption - check with CPA.

To Carl: refering someone to a web-site is not giving advise. There is criteria to be met before you can say yes. Again, I would check out the link and see if you meet the ownership test and the use test first. Not everyone has a CPA. Happy Hunting!

Again, I am not an accountant...

my understanding is that yes, you have to have lived in the home for 2 years (aggregate) out of the last 5 years (and here is the important part) as your PRIMARY RESIDENCE.

So you could live in it for 1 year, then rent it out for 3, and then live in it for the last year, and it would count as 2 years aggregate. But it has to be your primary residence, and then you are allowed a $250,000 deduction if single, and if married (and your spouse is also on the title) $250,000 additional for him/her.

but this can be a complicated issue, so always confer your tax professional.

We can't and shouldn't but you refer him to a web site Joe? I would call that still giving advise as a Realtor.
Tatiana, Realtors are getting spooked lately about giving advise on Trulia but Gail is correct in her response.
But, it's always best to consult your CPA about tax matters.

We really can't and shouldn't advise you about tax related issues however you should be able to find most of your answers in this publication: http://www.irs.gov/pub/irs-pdf/p523.pdf
Every case is different so check this out and see where you fit the profile.

Yes, each owner on the deed is entitled to $250k in capital gains. There may be some other issues if you have owned the property for less than 2 years...be sure to check with your accountant.

2 of the last 5 years will qualify you.

Hi Tatiana,

I think what they are referring to is the capital gain on your primary residence of two years. And yes, this is true to my knowledge. I'm just a REALTOR so I will always cover myself with "talk to your accountant". But I know you have to have it as your primary residence for at least 2 years to qualify. The amount doubles to 500k if you are married. But again, confirm everything with an accountant before making a decision that has $1,000s in the balance!

Brendan Murphy
Broker, CRS, GRI, ePro
Raving Real Estate
Laramie, WY 82070