NEW YORK (CNN/Money) - I'm in the process of selling my home and moving to a smaller place now that the kids have moved out. I know that the IRS rules regarding re-investing the profits from a home sale have changed, but I don't know exactly how. What are the new rules?

-- Bill Lucoff, Tiburon, Calif.

Well, I don't know if you can call these rules "new" since they became law eight years ago.

But here's the deal in a nutshell: A married couple that sells their primary residence can rake in a profit of up to $500,000 without having to pay income tax on the gain, while singles can shelter up to $250,000 from taxes.

Any gain beyond those thresholds would be taxed at the rate for long-term capital gains, which maxes out at 15 percent but could be as low as 5 percent if your taxable income is low enough.

By the way, unlike the house-gain rules that applied up until 1997, you don't have to reinvest those gains in another home to sidestep taxes. You can plow the gain back into a new home, invest it or spend it as you like.

Of course, a nutshell can never contain all the little exceptions, variations, conditions and catches that are part of our wonderful tax code.

And the rules that apply to home sales are no different.

In this case, the main condition you need to be aware of is that in order to exclude your home-sale gain from taxation, you must have owned and lived in the house as your primary residence for two of the past five years (although those two years don't have to be 24 consecutive months).

That said, you may still be able to have a portion of your gain excluded from taxation if you failed to meet the two-year test because of health, an employment change or "unforeseen circumstances."

The details for this exception -- as well as the details on all sorts of other little arcane qualifications -- are laid out in all their splendor in IRS Publication 523: Selling Your Home, which you can download at the IRS Web site (www.irs.gov).

While you're perusing this publication, you might want to take a look at the sections that deal with determining the "basis" of your home -- i.e., the value you deduct from the sales price to calculate the gain.

I say this not because I think you'll find it scintillating reading, but because this section could end up saving you a few bucks in taxes.

Let's say, for example, you and your spouse paid $150,000 for your home and, thanks to the real estate boom of the past few years, you've been able to sell your house for $750,000.

On the face of it, you may assume you've made a $600,000 profit and that, after the $500,000 exclusion for married couples, you owe tax on $100,000.

Ah, but perhaps you spent $20,000 to add a bathroom to the house. And maybe there was another $60,000 for that family room addition. And then $10,000 for a patio and another $10,000 in fencing and landscaping.

All of these would increase the basis of your home, reducing both your profit and your tax liability.

I suggest you scan good old Publication 523 for other types of projects and outlays that increase your home's basis. And while you're at it, don't forget to deduct selling expenses from the sales price, including the agent's commission, legal costs, any advertising costs you may have incurred as well as other expenses listed in the publication.

Who knows, you may be able to stretch that profit exclusion a lot further than you think.

Walter Updegrave is a senior editor at MONEY Magazine and is the author of "We're Not in Kansas Anymore: Strategies for Retiring Rich in a Totally Changed World."