The IRS allows a seller to exclude from his taxable income a gain of up to $250,000 on the sale of his home (or $500,000 if he is married filing jointly) if he:

1. owned the home and used it as his principal residence during at least two of the last five years before the sale,
2. didn’t acquire the home through a 1031 exchange during the past five years, and
3. didn’t exclude a gain on another home sold during the two years before the current sale.

See IRS Publication 523 for more information.