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".
$100,000 purchase price
$3500 closing cost fees that are deductible
Basis after closing $103,500
Capital Gain Improvements:
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.