Neil - Let's be honest about the debate on the 3.8 surtax on your home.
John and Mary sell their home for $600,000. They originally paid $50,000 for it. Their gain is $550,000. Because they meet the 2-out-of-5year rule, they can exclude $500,000 of that gain. The $50,000 remaining gain will be subject to capital gains tax, but will only be subject to the 3.8% surtax if their total income, including the $50,000 taxable gain, exceeds $250,000.