In 1997, American homeowners received one of the largest tax breaks in U.S. history. The Taxpayer Relief Act granted homeowners the privilege of excluding the gain on the sale of their homes within broad limits. The old rules merely allowed homeowners over the age of 55 to defer the gain on the sale of their homes by rolling it into the purchase of a new residence. Furthermore, this deferral was only available once per homeowner. But the new law has effectively swept those limitations away. Now homeowners who qualify can use this exclusion again and again. Obviously, this act has saved countless homeowners thousands of dollars in taxes, and also provided a real shot in the arm to the real estate industry.

But there are certain provisions that must be met in order to qualify for this special exclusion. The first condition is simply that the house being sold must be your primary residence, and not a vacation home or rental property. This condition is actually broken down into two parts:

1. The ownership test- the sellers must have owned the residence for two out of the last five years prior to the sale of the residence. For example, if the sellers rented the house for four years and then bought it a year before the sale, then they do not qualify for the exclusion.

2. The use test - the sellers must have actually lived in the residence for at least two out of the previous five years prior to the date of the sale. The two years do not have to be contiguous; they can be chronologically broken up in any way, as long as the total time spent in the residence is equal to at least two years.

Furthermore, the actual amount of the exclusion does have a limit. Single taxpayers can exclude up to $250,000 on the gain of their residences, while joint filers can exclude twice that amount, up to $500,000. But this money does not have to be used to purchase another residence; it can now be used for whatever the seller wishes. About the only other real limitation for this exclusion is that it can only be used by taxpayers once every two years.