Selling a house can be an exciting time, but also may cause confusion about the tax ramifications of the sale!
A house is considered a personal asset (assuming it it not a rental property or other investment property), and the general IRS rule is that a personal asset sold at a gain generates taxable income. However, there is an exception for the sale of your primary residence, called the Section 121 exclusion. If the Section 121 exclusion rules are met, you can exclude up to $250,000 of gain ($500,000 if married filing joint) from your income. These rules are found in IRS Publication 523, located here: IRS Publication 523 . Details about the Section 121 exclusion are below:
According to this Publication: to qualify for the Section 121 exclusion, you must meet both the ownership test and the use test. You're eligible for the exclusion if you have owned and used your home as your main home for a period aggregating at least two years out of the five years prior to its date of sale. You can meet the ownership and use tests during different 2-year periods. However, you must meet both tests during the 5-year period ending on the date of the sale. Generally, you're not eligible for the exclusion if you excluded the gain from the sale of another home during the two-year period prior to the sale of your home.
So, it is possible in your situation to exclude some or possibly even all the gain from the sale of your house, provided you met the tests listed above.
It's important to note that, under current tax law, what you do with the proceeds is irrelevant to the amount of the gain and what amount of the gain may be taxable to you. So, whether you use the proceeds to buy a condo or not, that decision will not impact the gain on the sale of your home.
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