Another bonus to the new rules? You don't have to buy another home with your sale proceeds. You can use the money to travel Europe in style, buy a recreational vehicle and drive across the country or get all those designer shoes you never could afford.
Even better, there's no limit on the number of times you can use the home-sale exemption. In most cases, you can make tax-free profits of $250,000, or $500,000 depending on your filing status, every time you sell a home.
Ah, but we are talking taxes here. You did notice that phrase "in most cases," didn't you? Before you put a "for sale" sign in the yard, you need to make sure your house-sale situation is one of those "most cases."
First, the property you're selling must be your principal residence. That means you live in it. This tax break doesn't apply to a house or other property that you have solely for investment purposes. In those cases, the usual capital gains rules apply.
You also must live in that principal residence for 2 of the 5 years before you sell it. This is known as the use test. It also means, practically speaking, each sale must be at least 2 years apart.
That still leaves you room to make some money on several properties. You can sell your residence this year, pocket any gain within the tax limits and buy a new residence. Then 2 years later, you can do the same thing, again and again, every 2 years.
And you no longer have to worry about that pesky prior-law reporting requirement. When your gain doesn't exceed the limit, you don't have to file anything with the IRS.
Second home sales take a tax hit
Owners of multiple homes, however, will now find it's not as easy to shelter sale profit as it used to be.
A provision of the Housing Assistance Act of 2008, the bill designed primarily to provide relief to some homeowners facing foreclosure, could cost the owners of a vacation or other type of 2nd property -- when they sell.
Previously, you could move into the 2nd property, make it your primary residence, live there for 2 years and then sell it and pocket most or all of the profit.
Now, however, even if you convert a 2nd piece of real estate to your primary home, you'll owe tax on part of the sale money based on how long the house was used as a 2nd, rather than your main, residence.
Special rules for married couples
While spouses get double the exclusion of single home sellers, couples also have some additional considerations when it comes to determining whether their sale is tax-free.
Either spouse can meet the ownership test. For example, the IRS says it's OK if you owned the home for the past 2 years, but you just added your new spouse to the title when you got married 6 months ago. Since you owned the residence for the requisite time, as joint filers, you have no problem meeting the ownership test even though your spouse wasn't an official owner for that long.
However, both spouses must pass the use test; that is, each must live in the residence for 2 years. But the shared use doesn't have to be while you file jointly. If you and your now-spouse shared the home for 1 1/2 years before tying the knot and then 6 months as newlyweds, the IRS will allow you to claim the exemption. But if your better half didn't move in until the wedding day, you're out of tax-exclusion luck.