Q: I feel like I’m in a Catch-22. My wife and I need to downsize our house, but I’m afraid of capital gains. We’ve already lost too much in this grim market so what are our options? — Adam Abode

A: Dear Mr. Abode: Do you want the good news first or the bad? You didn’t say at which end of the financial spectrum you “reside,” but if towards the top, you and the Missus better stay where you are. If you’re perched mid-level or lower, though, you — and most of the rest of us — are in luck.

First, let me explain the term “capital gains.” This sum is the difference between what you paid for a house and what you sell it for, less the cost of any capital improvements. The latter can be anything from adding a new bathroom to ceiling fans throughout or, in other words, any improvements that change the structure or “livability” of the home. (Normal wear-and-tear expenses don’t count.)

Upon sale of their house, married couples or co-owners may keep $500,000 in tax-free profits if they’ve owned and lived in the home for two of the past five years. Anything above that half million amount is taxed at 20 percent. If you’re a single homeowner, you can hang on to $250,000 and the same two out of five years’ residence is applicable. Additionally, you, too, are stuck with the 20 percent tax.

So what if you need to sell but haven’t lived in the home for those two years? You still can qualify for a prorated exclusion from the capital gains tax if you’re selling because a new job requires it or if you suffer from ill health that necessitates a move.

Tax Tip: Speaking of tax help for homeowners, you’re in luck if you bought your first house after April 8, 2008. In other words, if you haven’t owned a U.S. residence during the past three years, Uncle Sam regards you as a first-time homebuyer which earns you a tax credit of up to $7,500.

Ellen Phillips is a retired English teacher who has written two consumer-oriented books. Her Consumer Watch column appears on Saturdays in the Business section of the paper. An expanded version is at www.timesfreepress.com under Local Business. E-mail her at consumerwatch@timesfreepress.com