Hi, Trulia ...
If you're thinking of the home sale capital gains exemption, it works something like this:
1. You purchase a home this year.
2. You live in the property as your primary residence for a minimum of the next two years.
3. You sell the home at a profit after living in it as your primary residence for at least two years.
4. You may deduct at least $250,000 of profit from the sale from your taxable income.
The profit on the sale as outlined above is exempt from tax up to $250,000 for individuals and up to $500,000 for married couples filing jointly. If you were to move out of the property before the two-year period, you may qualify for a reduced exclusion based on your situation.
But what if you don't sell it after only two years? Or what if you move back and forth between other homes and the one you eventually sell?
Under these circumstances you may still be able to deduct the capital gain as outlined above, as long as you lived in the home you sell as your primary residence for a total of two of the past five years. So for example, if you live in the property for six months immediately after you purchase it, then move away for a year, then move back for a year, then live elsewhere for a year, then move back again for six months and then sell the property, you still should be eligible for the full deduction.
IRS Publication 523, available from the IRS website at http://www.irs.gov/taxtopics/tc701.html,
contains eligibility requirements for this deduction. In general, the IRS site has a lot of useful and plain-English information about how tax law applies to real estate. Take a look!
Most tax-preparation software can calculate your deduction and determine your eligibility automatically. Of course, it's always a good idea to consult a tax professional before filing to analyze your specific situation. A CPA might have additional suggestions about how to structure your tax liabilities to your advantage. For significant investments like real estate, the cost of a professional consultation is money well-spent!