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Home sellers: Patience is a tax virtue

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in Small Business Tax

Q: I'm selling my house this year and moving into our beach condo. I'll also eventually sell the condo, so I want to avoid paying tax on that sale, too. Can I call both of these houses my principal residence this year? T.H., Wilmington, Del.

A: No, but if you wait just a bit longer, you can reap both tax exclusions. You can shelter up to $250,000 of home-sale gain from federal income taxes ($500,000 for joint filers) if the home has been your principal residence for at least two of the past five years. Assuming the first home you're selling qualifies (counting this year), you can benefit from the $250,000/$500,000 exclusion for 2005. Then, you should live in the condo as your principal residence for at least two years before selling it. When you sell after two years, you can again shelter $250,000 (or $500,000) from federal gains taxes. End result: If you're married, you can reap as much as $1 million of tax-free income from those two sales.

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