What it is:
How it works (Example):
For example, let's assume John Doe buys a house in Austin, Texas, for $150,000. He moves in in April and stays there for six years. Then he sells the house for $225,000, creating aof $75,000. Because John lived in the house for most of the and it was his primary residence, the house is his main home. Accordingly, the $75,000 on his home is not taxable.
Now let's say that John Doe buys a second home in Austin for $100,000 and rents it out to Jane Smith. He gets sick of being a landlord and sells the house for $125,000, for a $25,000 . Because this house is not his main home, the $25,000 is probably taxable.
Why it Matters:
As you can see, identifying a person's main home has tax consequences. Main homes can be houses, but they can also be houseboats, mobile homes, co-ops or condominiums. The IRS requires to live in their main homes for at least two years during the five-year period ending on the date of the to avoid taxation on a certain amount of (typically $500,000 for a couple).