The capital gains tax is a nasty surprise to many home sellers. Fortunately, Uncle Sam does feel your pain.

“One of the most critical yet often overlooked costs affecting home sellers is capital gains tax liability,” says Richard Roll, president of American Homeowners Association (AHA).

“It pays to explore IRS rules adopted in 1997 designed to provide some relief.”

Here's how to axe the tax and carve out your exclusion.

The new exclusion allows you to sell a primary residence once every two years and exclude up to $250,000 (or $500,000 for a married couple) of gains on the sale. The old rule of “once in a lifetime” or being a certain age no longer applies.

In addition, you must have owned the property for at least two years within a five-year period; the property must pass the primary residence test; and, you can't sell more than one primary residence in any two-year period.

If you meet these basic criteria, you can probably take the exclusion.

You also might qualify to exclude gains on sale of a rental or vacation home by converting it into a primary residence. It's a little complicated but altogether possible and legal.

If you are lucky enough to own two properties, and want to sell both of them, it may be possible to exclude gains from both. Sell your current primary residence first, take the exclusion, and move into the rental property. After a period of two years, you can sell it as your primary residence and take another exclusion.

The good news is that by converting the second property into a primary residence, you can exclude capital gains resulting from appreciation while it was a rental, up to the $250,000 or $500,000 cap.

Remember, however, that any depreciation taken after May 6, 1997 will be subject to recapture and tax. Under this scenario, depreciation taken before that date is forgiven and available for the gain exclusion.

Talk to your financial advisor for more ideas about saving on capital gains, and consult IRS Publication 523 for the rules.

For more information on any aspect of buying or selling a home, go to www.realhome.com, the web site for American Homeowners Association.