If you meet the ownership and use tests, you will generally only need to report the sale of your home if your gain exceeds a certain dollar amount prescribed by law. To determine the amount of gain that can be excluded from income refer to Publication 523, Selling Your Home. You may be entitled to exclude gain from income if during the 5-year period ending on the date of the sale, you have:

• Owned the home for at least 2 years (the ownership test), and
• Lived in the home as your main home for at least 2 years (the use test).

If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim an exclusion in some cases. If you are required or choose to report a gain, it is reported on Form 1040, Schedule D (PDF) , Capital Gains and Losses .

If you were on qualified extended duty in the U.S. Armed Services or the Foreign Service you may suspend the five-year test period for up to 10 years. You are on qualified extended duty when the extended duty lasts for more than 90 days or for an indefinite period AND:

• At a duty station that is at least 50 miles from the residence sold, or
• When residing under orders in government housing.

This change applies to home sales after May 6, 1997. You may use this provision for only one property at a time and one sale every two years.

References:

• Publication 523, Selling Your Home
• Tax Topic 701, Sale of your Home - after May 6, 1997
• Tax Topic 703, Basis of Assets

Source: www.irs.gov