The capital gains tax is a federal tax levied on the profit from the sale of capital, which can refer to many things including property. Therefore many taxpayers wonder if they need to pay capital gains taxes after they sell their house. However, the answer to this question is not a simple yes or no answer, as the IRS code is long a complicated.
$250,000 Exclusion Rule
Individual taxpayers do not have to pay taxes on profit of up to $250,000 (or $500,000 for a married couple) as long as you have lived in the house for at least two years. However it is important to note that those two years do not need to be consecutive. As long as you have lived in the house for a minimum of 24 months in the five-year period leading up to the sale of the house, then you will be fine.
2-Year Exceptions
If you have not lived in the residence for a full 24 months, then you may be able to exclude a portion of your gain, or if you fit one of the following conditions you may be able to exclude the full amount.
1. Job Location Change
If you have to move for work, and can show proof to the IRS, then you may be able to exclude part of the gains you make from the sale of your house.
2. Health Problems
If you, or an immediate family member, has a health condition that requires you to sell your residence then you may be able to exclude the profit from your taxes. However, you will need to get a letter from a doctor and include it with your tax return.
3. Unforeseeable Circumstances
If you need to sell your house because of an unexpected problem then the IRS may allow you to avoid capital gains taxes. According to IRS Publication 523 unforeseeable circumstances are "the occurrence of an event that you could not reasonably have anticipated before buying and occupying your main home."
How to Report the Gain
If you do need to claim a capital gain then you will need to report it on IRS Schedule D. If you owned the property for less then a year then it will be a short-term capital gain. Otherwise it will be a long-term capital gain.
Further Reading
For more information on capital gains taxes, and the profit from the sale of property check out the following links.