I bought my house in Sept. 2003, live there for the hold time I owned the house until I sold it in Sept of 2007. Paid off a mortgage of 305,000.00 and walked away with 25,000.00 in my pocket. I only owend the house 4 years. Will I qualify for the tax exemption for the sale of my house or do I have to count the 25,000.00 as earned income when I file my taxes?

I believe that the first $500,000 is exempt from capital-gains tax. What have you done with the $25,000? If you used it to purchase another home or for certain other types of investments then that exempts it as well.

From what you have stated the gain of $25,000 (the limit is $250,000) is tax free. You do not need to invest the profit. You are not even required to report the sale.

These are the three requirements
1. In the last 5 years from the date of sale of the house, you owned the house for two years and lived in the house as your main house for two years.
2. In the last 2 years you did not exclude the sale of any other house.

Agreed!