The 1997 Taxpayer Relief Act contains a big break for homeowners. If you sell your home, you may exclude up to $250,000 of your capital gain from tax. For married couples filing jointly, the exclusion is $500,000. Also, unmarried people who jointly own a home and separately meet the tests described below can each exclude up to $250,000.

The law applies to sales after May 6, 1997. To claim the whole exclusion, you must have owned and lived in your residence an aggregate of at least two of five years before the sale (this rule is called the "ownership" and "use" test). You can claim the exclusion once every two years.
But even if you don't meet the test, you still may be entitled to a whole or partial tax break in certain circumstances.

Even if you haven't lived in your home a total of two years out of the last five, you are still eligible for a partial exclusion of capital gains if you sold because of a change in your employment or health, or other unforeseen circumstances. You get a portion of the exclusion, based on the portion of the two-year period you lived there. To calculate it, take the number of months you lived there before the sale and divide it by 24.
For example, if an unmarried taxpayer lives in his/her home for 12 months, and then sells it for a $100,000 profit due to an unforeseen circumstance, the entire amount could be excluded. Because he/she lived in the house for half of the two-year period, he/she could claim half of the exclusion, or $125,000. (12/24 x $250,000 = $125,000.) That covers her entire $100,000 gain.