• The IRS regulates the sale of residential property for tax purposes.house image by Brett Bouwer from Fotolia.com
  
  The Internal Revenue Service allows tax-free profits on the sale of residential property. The special exclusionary rule allows taxpayers to avoid capital gains in limited situations. Under the IRS' capital gains tax exclusions, a taxpayer may exclude up to $250,000 in residential real estate profits made from the sale of a primary residence. Note: Because laws may frequently change, you should not use this information as a substitute for the advice of a professional attorney.
  
  

Exclusion from Capital Gains Taxes

• The IRS allows property used as the homeowner's main home to be considered eligible for exclusion if the taxpayer lived in the home for two of the last five years prior to the settlement date.
  
  The limit is increased for married taxpayers filing jointly, and these taxpayers may take full advantage of the $500,000 exclusion. The home may have been used as an investment, but the IRS requires the homeowner to have lived in it for the requisite time period.
  
  The IRS also provides a partial exclusion from capital gains taxes if the homeowner does not meet the required two-year time period. In situations where homeowners are forced to move due to work relocation or medical reasons, the taxpayer can take a reduced tax-free benefit.
  
  The IRS has special rules for homeowners serving in the armed services and those who are deployed under military orders. In these situations, the 24-month period is not required.
  
  

1031 Exchanges

• Profits or gains made through a like-kind real estate exchange are not considered a taxable event when the exchange occurs. The taxes are assessed upon the disposition or sale of the home. In order to defer the capital gains from a 1031 exchange and take advantage of the IRS' non-recognition of gain rules, the IRS requires that you used the home as your primary residence for at least two of the last five years prior to the exchange.
  
  

Sale of Property Incidental to Divorce

• Selling property to a spouse as a result of separation or divorce is not treated as income. The IRS will not tax any profit from a divorce buyout when spouses refinance their property interest in the home to satisfy the terms of a property settlement agreement. There is an exception for nonresident immigrant spouses, and in these situations, the sale is treated as a taxable event.
  
  

Expatriates and Alien Taxpayers

• The IRS does not allow taxpayers who have renounced U.S. citizenship to be eligible for the capital gains exclusion rules.
  
  

Investment Homes/More than One Home

• Gains may only be excluded from the proceeds made during the sale of the taxpayer's principal residence. If the taxpayer owns more than one residence, the IRS only allows the taxpayer to exclude gain from one home every two years. If the taxpayer spends time in both homes during the year, the IRS typically considers the main home to be the one used more often.