The average family selling a home for the first time and moving on to another home or newer town will not need to worry about capital gains. According to the IRS, when you sell your primary residence (the key word here is primary residence or the home you actually live in), you can realize up to $250,000 in profit without owing capital gains taxes. That number is doubled for married homeowners to $500,000.

The Primary Residence Requirement
In order to qualify for the exemption from capital gains taxes on the sale of your home, it must be your primary residence. However, the IRS offers a great deal of latitude in defining a primary residence as a home you own and live in for two of the previous five years before selling the home.

While it is possible to sell multiple homes without acquiring a capital gains tax penalty, you must wait two years between these transactions. This makes sense as the intent is for this home to be your primary residence and the IRS requires two of the past five years of residence in order for the home to qualify.

Exceptions to the Two-Year Rule.
For every rule, there is usually an exception. The same holds true when it comes to the two-year rule for capital gains exemptions. If you have lived in your home less than two years, you may still exclude a portion of the gain if you are forced to move due to a change in jobs, the result of health-related issues, or other unexpected issues. These unexpected issues include the destruction of your home, divorce, death, loss of a job, and acts of terrorism or war.

Another exception occurs when one of the primary residents of the home becomes suddenly disabled (mentally or physically) and can no longer care for him/herself as a result of the disability. As long as the individual lived in the home for one year before being moved into a licensed care facility, the time the individual lived in the primary care facility may count towards the two-year rule.

Upping the Ante for Bigger Tax Benefits.
Another way to avoid capital gains taxes on higher ticket home sales is to add more owners.
As long as the owners meet the residence requirements, they can each shelter an additional $250,000. This means if you add an adult child as a homeowner who has lived in the home for two of the past five years along with you and your spouse, the three of you can shelter a total of $750,000 profit from capital gains taxation.

No one wants to pay unnecessary taxes. The government has granted homeowners a major boon when it comes to eliminating capital gains taxes on home sales. Keep in mind though, that these are generalized rules, and may not apply to every situation. That said, keep these capital gain rules in mind when you sell your home in order to maximize your tax savings.