The Taxpayers Relief Act of 1997 established the exclusion of capital gains on the sale of the principal residence.  Married homeowners, who file jointly, may exclude up to $500,000 from capital gains tax for profits on the sale of a principal residence.  Single filers may exclude up to $250,000 from capital gains tax for profits on the sale of a principal residence. 

Homeowners, whose gain exceeds the maximum for exclusion, must pay tax on the amount over the exclusion.  The exclusion can be taken more than once.  However, the home must have been used as a principal residence for two of the preceding five years.  The rule does not apply to second homes or vacation property.