Tax on Sale of the house

[Suneel P.]

I read that we have to prove that the house is owner occupied for 2 of the 5 years before the sale to avoid capital gains tax. How do we prove that? What evidence we have to provide to IRS? And if we are not eligible for capital gains tax, is all the profit from the sale tax free?

[Ned Carey]

@Suneel P. I don't know what specifically would be needed but generally you might need some kind of evidence. Anything you can think of can be Helpful. Here are some examples; Was your mail sent to the house, do you have bills in your name at that address, Did you do a change of address notice to show when the date changed from being owner occupied, was the home listed as owner occupied with the state, etc.

     "And if we are not eligible for capital gains tax, is all the profit from the sale tax free?"

Your question is not very clear. The two out of five year rule qualifies you for a capital gain exclusion. In other words if you have a capital gain you do not pay tax on it. If you do not qualify for the exclusion (ie. lived there less than 2 out of the last 5 years) you pay a capital gains tax. 

A capital gain is basically when you sell for more than you paid. If you own something for more than a year you pay "long term" capital gain tax rates on that. Those are lower than regular tax rates. Also Loans on a property do not figure into capital gains. How much you get back at settlement can be a very different number than your "Capital Gain" 

As @Bob Reinhard said, tax advice should come from a qualified accountant or other tax professional. Getting this right can save you lots of tax dollars. Screwing it up can cost you lots of tax dollars. It is worth paying for professional advice.