I wanted to pass along some info from the friendly folks at the IRS(always speak with your tax advisor!!):
Sale of Residence – Real Estate Tax Tips
You may qualify to exclude from your income all or part of any gain from the sale of your main home. Your main home is the one in which you live most of the time.
To claim the exclusion, you must meet the ownership and use tests. This means that during the 5-year period ending on the date of the sale, you must have:
Either Owned the home for at least two years (the ownership test) and Lived in the home as your main home for at least two years (the use test).
If you have a gain from the sale of your main home, you may be able to exclude up to $250,000 of the gain from your income ($500,000 on a joint return in most cases).
If you can exclude all of the gain, you do not need to report the sale on your tax return. If you have gain that cannot be excluded, it is taxable.