Two year tax law- regarding homeowners?

Question

I have owned my home for a little over 1 year (in Alabama). I paid $215,000 for it (paid in cash, no financing needed).
I want to move soon to a bigger house so the house will cost more than my current one.
I was wondering what exactly the 2 year tax law is? Does it apply ALL the time or are there ways to get out of it or not have to pay it?

Thanks in advance.

If you can also provide a link with the exact law that would be great.

I meant to put I bought my house for $211,00- I would be selling it for about $220,000 because I did some improvements.
So if I actually got $220,000 for my house- how much taxes would I pay if I did move before the 2 year mark?

Answer 1

IRS publication 523, sale of home (it's a smaller pub than pub 17--same info).

If you don't qualify for the 2 year rule, then since you *have* had the house at least one year, the gain is taxed at no more than 15%, not your ordinary tax rate, so the bite isn't too big.

Eg, you paid 215, you sell at 250, you spend 15 on commissions...so you have a gain of $20K and a tax bill of $3000. You are still 17K ahead.

(Using your numbers of $211 and $220, you won't have gain after improvements and selling expenses.)

Answer 2

This law says that the gain (difference between the price you payed and the price you sold) is taxable income unless you have occupied it for more than 2 years. There are exemptions. You can find all the details in this IRS tax publication. Information on exemptions start on page 10.

Answer 3

You have to have owned the home for two out of the last 5 years prior to sale, and lived in it as your main home for two of those same 5 years - if so, up to $250K of gain ($500K on a joint return) is exempt from tax. If you don't meet the 2 year rule, there are a couple exceptions where you can prorate the exempt amount based on how many months you DID meet those requirements: if you moved for job or health reasons, but not if you just moved because you wanted a bigger or a different house.