Q. My wife and I are in our eighties. We are contemplating selling our home, in which we have lived for more than 34 years. What is the tax situation on this sale? Must we purchase another home within a stated period of time to earn the exemption from taxes on the profits realized?

A. There are two ways for homeowners to capitalize on tax savings when they sell their principal residence. This residence can be a single-family house, a condominium or a cooperative apartment.

The first way is known as the "rollover." Under this method, if the homeowner purchases a new home for a price equal to or greater than the selling price of the principal residence, any profit made on the sale of the first house is "rolled over" into the new house. No more than two years can elapse between the time that the new house is purchased and the old house is sold, although it makes no difference for tax purposes which comes first -- the purchase of the new house or the sale of the old house.

Let me give you an example of how this works. Let us assume that you purchased your principal residence several years ago for $50,000. The house is now sold for $100,000. For simplicity purposes, let us ignore for the moment any expenses incurred, such as major improvements to the house, real estate commissions or other such selling expense. In our example, you have made a $50,000 profit on the sale of your previous residence. Now you can buy a new house for a price equal to or greater than the selling price of your old house, which has to be $100,000 or more. Let us further assume that the new purchase price is $150,000. For tax purposes, the $50,000 which you have rolled over is used to reduce the new purchase price -- referred to in tax circles as the "basis" of the house. Thus, although you have purchased the new house for $150,000, by rolling over the $50,000 profit, your new basis is $100,000.

If, for example, you later sell that same house for $200,000, although you actually have made only a $50,000 profit on that house (i.e., the difference between $200,000 and $150,000), for tax purposes your profit is $100,000. This is calculated by subtracting the basis ($100,000 from the selling price $200,000), and you ultimately may have to pay capital gains tax on the overall profit of $100,000.

However, pursuant to the great American dream created by Congress, yet another benefit is available for our senior citizens. If you are 55 years of age or older prior to the date of the sale of your principal residence, you may elect to exclude up to $125,000 of the gains realized on the sale. It is important to note that, for married taxpayers who file separate tax returns, the maximum exclusion is only $62,500 on each separate return.

Thus, if you are married and if you file a single tax return, in our example when you sell your last house, you will be entitled to exempt the full $100,000 profit for tax purposes.

There are a number of legal requirements for this once-in-a-lifetime exclusion. First, you have to be at least 55 years of age before the sale. You must have owned and used the residence as your principal residence for a total of at least three years during the five-year period ending on the date of the sale of that property. And this exemption is good only once in your lifetime.

You need not purchase another property to take advantage of the once-in-a-lifetime exemption.