Taxpayers may exclude from taxation $250,000 ($500,000 if married and filing a joint return) of gain from the sale or exchange of their principal residence, provided that during the five years preceding the sale, the taxpayer used the property as a principal residence for two or more years. Effective May 7, 1997, it is no longer required that the taxpayer be age 55 or older in order to gain the exemption. The "old" law regarding deferral of gain when a taxpayer purchased a new home are repealed. This tax brake is reusable every two years, although complicated rules on the five year ownership, "unforeseen events", and marital status also apply. Taxpayers with sales or contracts signed after May 6, 1997, but before the date of enactment have the option of using the old rollover deferral and age 55 or over exemption instead. While this may seem as a blessing in disguise for most taxpayers, sellers coming out of "high rent" districts may not fare so well. With the elimination of 2 years deferral, those sellers with collective profits on the sale of their residence in excess of $500,000 will find themselves in a "taxing" situation, with no alternatives.

The following article, from Tax Wise Money, offers a terrific way to build over $350,000 in tax-free money by selling your home.

If you listen to Clinton or Gingrich, you'd think the new tax laws are the greatest thing since sliced bread. They want you to think you're getting a tax break, but the tax code actually became infinitely more complicated.

In fact, the new law actually raises taxes on the most productive members of society, the self-employed.

But we want to look at the brighter side of things. We've developed a strategy using the new tax law that can earn you nearly $300,000 just by selling your home!

Up until now, the government entitled you to a $62,500 exclusion on the sale of your home or a $125,000 exclusion if you filed as a married couple. The IRS, however, made you jump through hoops to get it.

First, you had to be 55 or older. Second, you could only take the exclusion once in your entire life. Third, if you didn't exclude the full $125,000, you couldn't get the rest later. Fourth, you had to own the home five years before the sale to get the exclusion. Fifth, you had to use the home as your principal residence for three of those five years.

Under the new law, your exclusion will jump from $62,500 to $250,000 for singles and from $125,000 to $500,000 for married couples.

Better still, a lot of the hassle is being shelved. The 55-or-older rule will be eliminated. And, the one-shot rule will be scrubbed, too. You could get the $500,000 exclusion every two years. What's more, you'll only have to live in the home for two years prior to selling it.

Step 1: Sell your $200,000 home and exclude the full amount.

Step 2: When you shop for your new home, get a smaller one if possible. Get a home for $75,000 and take out a mortgage.

Step 3: Use your $200,000 tax free profit to buy two rental homes valued at $50,000 apiece. That leaves you with $100,000 left over to invest.

Step 4: Rent the first home out at $500 a month for three years. Rent the second one at the same rate for five years. That'll total $48,000 in income. If you're in the 28% tax bracket, you'll clear $34,560.

Step 5: At the end of the third year, move into the first rental home. Stay there for two years so you can get an exclusion, and then sell it. If the value of the rental home increases by 7% each year, you can sell it for $67,500 after five years. Do it and take a $67,500 exclusion.

Step 6: Now that you've collected five years worth of rent on the second rental home, move into it. Wait two years for your exclusion and sell. If the value of the home increased at the same rate as the first rental property, you can pass it on for $74,500. Exclude the full amount.

Step 7: Move back into the $75,000 home you're paying the mortgage on.

Since selling your first home, you could amass $242,000 in tax-free profit! That's a 17% gain over the value of the $200,000 home you sold in Step 1! Add in what you cleared from renting out the two homes you bought in Step 3, and you've made $276,560! A 28% gain!

Why stop there? If you want to build an even larger fortune start the process over again. Using the same numbers, your tax-free profit would be $284,000. Add in another five years of rent and, after taxes, your total profit is $353,120! It's a perfect tax-wise strategy for securing your stress-free retirement.

Recorded with permission from Tax-Wise Money, August 1997. Copyright 1997 by Tax-Wise Money, Baltimore, Maryland.