Homeownership, at least according to the Internal Revenue Code, still remains the great American dream. We continue to buy and sell homes, rolling them over into more expensive properties, and then when we reach 55 years of age, we are entitled to exclude up to $125,000 of our profit.

This is referred to as the "once-in-a-lifetime exclusion of gain," and is found in Section 121 of the Internal Revenue Code.

There are strict conditions that must be met.

First, the taxpayer must be at least 55 years old before the date of sale. Just because you turned 55 during the year the property is sold will not meet the legal requirement.

Second, the exclusion applies only to the sale of your principal residence, which includes condominiums and cooperative apartments.

Third, the taxpayer must have owned and used the property as his or her principal residence for a total of at least three years during the five-year period ending on the date of the sale.

In 1988, Congress modified this use period for taxpayers who become physically or mentally incapable of self-care and reside in any facility -- including a nursing home -- licensed by a state or political subdivision to care for an individual in the taxpayer's condition. Under those circumstances, for sales after Sept. 30, 1988, the taxpayer must have lived in the property for at least one year during the previous five-year period.

For married taxpayers filing separate returns, the maximum exclusion is $62,500 for each return.

It should be noted that if one spouse meets all three requirements for the exclusion, both spouses are treated as meeting the requirements.

Thus, if the husband, for example, is over 55 and meets the other two tests, even if the wife does not meet the tests, the IRS has ruled that they are both eligible for the once-in-a-lifetime exemption.

Although the tax law is not always clear, the Internal Revenue Service has given some guidance which will be helpful in considering the applicability of the once-in-a-lifetime exemption.

According to the IRS, qualifying ownership and use need not be concurrent. Take, for example, a case where a taxpayer occupied a rental apartment that later was converted to a condominium unit, which the taxpayer purchased. According to the IRS, the userequirement was met because of the length of time the taxpayer occupied the property, even though he or she did not own it for the full five years.

Keep in mind that the once-in-a-lifetime exclusion is an election, unlike the rollover rules, which are mandatory. Just because you sell your property, and meet the tests of the once-in-a-lifetime provision, does not mean that you have to claim exclusion. There may be reasons to elect not to take the exclusion on this sale, but rather wait for future sales.

However, remember that this is a once-in-a-lifetime election, and married couples are entitled to only one election per couple -- not one for each spouse. If a couple makes an election during their marriage and subsequently divorce, no further election is available to either of them or to their future spouses should they remarry.

Indeed, the Internal Revenue Code seems to encourage couples not to marry until after they have taken their once-in-a-lifetime exclusion.

For example: You and your prospective spouse are both over 55. Each of you owns a house that cost $50,000, and both of you can sell that property for $200,000 each. Together, you would have gain of $300,000. If you married before you sold your respective houses, you would be limited to an exemption of $125,000. However, if you both sell your house before the marriage, you can each exclude the $125,000, for total of $250,000 worth of exemption. Then you can tie the marriage knot.

Furthermore, in our example, you each sold your house for $200,000 minus the $125,000 exemption. This means that each of you are eligible to rollover into a property costing at least $75,000 each.

By pooling your resources, as long as your new house costs as least $150,000, you will be able to combine the once-in-a-lifetime with the rollover, and pay no taxes.

There are times when you may want to revoke an election previously made, since your circumstances have changed. The law permits the election to be revoked at any time before the latest of the following dates: three years from the due dates of the federal income tax return for the year of sale; three years from the date the return was filed; or two years from the date the tax was paid.

If, however, the taxpayer is married, the revocations may be made only if the spouse joins in such revocation. The election is revoked by a statement filed with the IRS, showing the taxpayers' names and social security numbers.

This once-in-a-lifetime exclusion has many ramifications. Every taxpayer has different consideration and raises different fact situations. Clearly, before you even enter into a contract to buy or sell a principal residence, whether you are approaching or past the age of 55, it is recommended that you contact your tax adviser for specific tax and legal advice. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036.