ignoring the improvements for a moment, you would qualify for the Home sale exclusion - $250K (single filing status) - if it was your principal residence for any 2 out of 5 years before the sale. The improvements won't matter if the HSE exclusion eliminates any taxable gain. if there is still a gain, you are at the mercy of the IRS. It could take the position upon audit prove the $ amount or lose it. The pictures might help.
