In addition to the $250,000 (or $500,000 for a couple) exemption, you can also subtract your full cost basis in the property from the sales price. Your cost basis is calculated by starting with the price you paid for the home, and then adding purchase expenses (e.g., closing costs, title insurance, and any settlement fees).
To this figure, you can add the cost of any additions and improvements you made that had a useful life of over one year. Finally, add your selling costs, like real estate agent commissions and attorney fees, as well as any transfer taxes you incurred. By the time you finish totaling all these costs of buying and selling and improving the property, your capital gain on the sale will likely be much lower, enough to qualify for the exemption.
Kimerly Polak Guerrero
Polero ICE Advisers
New York, NY