Hi Home Selling in Cleveland Park!
Your friend is thinking about a tax provision that was changed many, many years ago. You are almost right - -In general sellers can exclude from income up to $250,000 (for a single filer) and $500,000 (for joint return) in profit from the sale of a principal residence if they lived in that property for at least two years during the 5 year period ending on the date of the sale. There are a number of different tests/caveats/exceptions & computations that go into determining eligibility and profit/gain. For more info consult a tax adviser. Also, check the IRS website (www.irs.gov) and Publication 523 - "Selling Your Home."