Will I have to pay taxes on my profit?

As you know from the tax deductions that have flowed from owning your home, housing is probably the most tax-advantaged investment available to most taxpayers. When you sell your home, taxes come into play in many ways. Because of the Tax Relief Act of 1997 and other tax law provisions:

- Up to $500,000 of any capital gains realized on selling your residence is excluded from taxation ($250,000 for singles and those using married, filing separate status).

You must have owned and used the property as your principal residence for at least 2 of the 5 years leading up to the sale date. You can exclude $500,000 on sales over and over, but there must be at least 2 years between each sale.

- If your gains are larger than the $500,000 or $250,000 exclusing amounts, you can reduce the tax by deducting from the sale profit:

a. the cost of improvements
b. the cost of broker's commission and lawyer's fees.
c. the cost of title insurance, recording charges, transfer fees and other settlement or closing costs.

- You can reduce your immediate tax burden, in situations where the gains are larger than the exclusion amounts, by making an installment sale where you spread out your income - and taxes - over a period of years.

- In cases where the gains exclusion is not available or not large enough to eliminate the gains, if the residence is converted to an investment property, a Section 1031 "tax-free swap" might be used to defer the gains into another investment property. You should consult with your tax professional in such situations, particularly since you might be losing the benefit of the $500,000 exclusion.

- If your lender requires you to pay a penalty for paying off your mortgage before its due date, that charge is deductible.

Remember: All tax matters are subject to change and you should consult your professional tax preparer or accountant before making any claims.