Did you sell your home in 2013? If you owned and used it as your principal residence for two of the five years preceding the date of sale, then you can exclude from income the gain up to $250,000, or $500,000 on a joint return. If you bought your home a long time ago and had a large gain, you may still use this shelter to avoid paying any tax on the sale b...y correctly figuring your tax basis and gain realized.
Gain is the difference between the amount realized (the selling price less broker's commissions) and your tax basis. Tax basis is the original cost of the home increased by capital improvements you made to it over the year. Capital improvements include a new roof, an addition, fencing, a new alarm system or even new appliances. IRS Publication 523 gives an overview of this rule.
Caution: If you took a home energy tax credit in past years for adding insulation, storm windows, or solar panels, then you must reduce your basis for these capital improvements by the amount of the credit.