We purchased a home in August 2005 for $516,000 and already are looking to sell that house and move back to our old town. If we sell the house in June 2006 for about $640,000, will we owe capital-gains taxes on our profit even if we put the money right back into the purchase of a new home as a primary residence?

Married couples can exclude up to $500,000 in home-sale profits from their taxes ($250,000 for singles), as long as they've lived in the house for two out of the past five years. Because you haven't lived in the house for two years, you may owe capital-gains taxes on your profits -- regardless of whether you plan on using any of the money for a new home.

Depending on the reason for your move, however, you still may be able to exclude a portion of your profits from taxes. You can take a partial exclusion if you had to move because of a new job that is at least 50 miles farther away from your old home than your old job was. You also can get a partial exclusion if the move was made because of your health or the health of relatives in your care, or because you are affected by other unforeseen circumstances approved by the IRS, such as death, divorce, becoming eligible for unemployment compensation, multiple births from the same pregnancy, damage to the home from a disaster or act of war or terrorism, and a few other reasons. For a full list, see IRS Publication 523 Selling Your Home.

If any of those circumstances apply, you can exclude part of your profit based on the number of months you lived in the house. If you lived in the house for ten months, for example, you'll be able to take 42% of the exclusion -- ten months out of 24. Because you're married, you'll be able to exclude $210,000 of your profits from taxes. If you sell it for the price you're expecting, it looks like you may still qualify to exclude all of your profits.

If those circumstances don't apply, then you'll need to pay capital-gains taxes on all of your profits. The gain will be considered short-term and taxed at your income-tax rate, if you owned the house for less than a year. Or you'll pay long-term capital gains taxes if you owned it for more than a year (15% for most people). If you don't qualify to exclude your profits, then consider waiting until August to sell your home so your profits can be taxed at the lower rate.

You also can lower your tax bill by adding closing costs and qualified home improvements to your tax basis. For more information about these rules, as well as other ways to lower your tax bill when you sell your house, see Homeowners' Tax Help.

MORE: Kiplinger.com | Your Money | Taxes | Column

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