In the past, homeowners only had two ways to avoid capital gains on the sale of their primary residence. Section 1034 allowed home sellers to avoid capital gains tax as long as they purchased a more expensive home, often forcing a purchase of more house than necessary. The other, Section 121, allowed a once-in-a-lifetime $125,000 exclusion on capital gains which often went unused due to saving it for the right time.

Homeowners were given an extraordinary opportunity in the 1997 Taxpayer Relief Act, which is available even if the old one-time exclusion has been taken. To qualify the home must be your primary residence for two of the last five years. Married taxpayers filing jointly can exclude up to $500,000 of gain on the sale, and single taxpayers can exclude up to $250,000 of gain. Homeowners are allowed to take the exclusion once every two years, and as of May 1998 there is no cap on how much total gain can be excluded during a lifetime.

Many groups can benefit from cashing-in on their equity while avoiding a major tax bite: Empty-nesters and retirees can downsize or rent; Do-it-yourselfers can renovate and move on without having to move up; Landlords can convert rentals into primary residences and sell them off over time. As with all tax, legal or real estate matters, you should consult with a professional regarding your own specific situation.