Thank you for your question. In order to determine if you owe capital gains tax on the sale of your primary residence, you will need calculate and see if you have a capital gain. The gain on this sale of your primary residence is calculate by:
1. Starting with the amount of proceeds on Box 2 the the 1099-S or if you do not have this, you can use your home sales price.
2. Subtract your selling expenses, such as commissions and other allowable expenses from the amount in #1. This will provide you with the "amount realized".
3. Next, you will need to calculate your "tax basis". In order to determine your "tax basis" you will start with the original purchase price, sales costs, plus the cost of additions, improvements, upgrades that added value or useful life to your home. (Cost of repairs or maintenance that are necessary to keep your home in good condition but don't add to its value or prolong its life don't increase your tax basis.) In order to determine your capital gain, you will then subtract your "tax basis" from the "amount realized" in #2.
Depending on the amount of your capital gain, you may or may not need to pay tax depending if you qualify for an exclusion. You typically would not have to pay capital gains taxes on the first $250,000 of profit if you file taxes as a single person, or $500,000 if you filed married person. In general, to qualify for the 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.
Even if you meet the exclusion of gain and do not owe tax on this sale, you are still required to report the sale to both the IRS and the state in which the home was sold (unless you are not required to file a state income tax return in your state). Be sure to report any 1099-S information you may receive from the sale. You indicated that you would only be living in the state where your home was located for 2 months and another state for 10 months. Typically, in this situation you would file a Part-Year resident return for the state where you were domiciled for 2 months and a Resident return for the state where you will be living for 10 months. Any state taxes due from the sale would be reported and paid to the state in which you were domiciled and sold the property. However, each state has specific requirements regarding filing requirements, so depending on the states affected, you will want to verify.
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