WASHINGTON  -- Pay attention to the fine print of the home-sale tax exclusion, or you could face an unexpected tax bill, a tax expert warns.

A provision in the 1997 "Taxpayer Relief Act" excludes from tax the first $250,000 in profits from sale of a home for individuals. For married couples, the first $500,000 is exempt from tax.

Bob D. Scharin, editor of Warren, Gorham & Lamont/RIA's Practical Tax Strategies, said some home sellers, particularly those selling a second residence or a vacation home, could face a tax bill even if their profit is less than $250,000.

"It pays to know the ins and outs of the tax law prior to going to your home closing, so you will have no surprises," Mr. Scharin said.

The tax break is generally available to people who live at least two of the last five years in the home. That means the deduction isn't available for vacation homes, since such homes don't qualify as a "primary residence" under the tax laws.

Homeowners should also be careful when selling a two-family home where the family lived in the main residence but rented out the basement apartment to help pay the bills. The gain from the primary-residence section of the home can qualify for the tax exclusion but gains from the rental apartment don't, Mr. Scharin said.

In addition, a home used for a family member, such as a condominium bought for a child attending college, can't be claimed as the parents' principal residence if they don't live there full time.

To determine the taxable value of a home sale, a homeowner must calculate the "basis," which starts with the original purchase price and adds in the cost of improvements. The basis rules figure prominently when a taxpayer inherits a home from his or her parents. The basis is calculated on the date of the decedent's death.

Mr. Scharin provided the following example: The home was originally purchased for $50,000 and its value rose to $300,000 by the time of the parent's death. The children inherit the property at the $300,000 value; if they sell it a short while later for $325,000, only the $25,000 gain can be counted against the tax exclusion.

"The exclusion for gains from home sales is a wonderful tax break, but it does not cover all situations," Mr. Scharin said.

Questions, comments or suggestions on this article? Have a news tip? Send an e-mail to: margo@margomiller.com.

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