From the IRS web site: (http://www.irs.gov/faqs/faq10.html) For home sales after May 6, 1997, 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), * Lived in the home as your main home for at least 2 years (the use test), and * During the 2-year period ending on the date of sale, you did not exclude gain from the sale of another home. If you owned and lived in the property as your main home for less than 2 years, you may still be able to claim a reduced 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 intelligence community (sales or exchanges after December 20, 2006, and before 2011) you may suspend the five-year test period for up to 10 years. You may use this provision for only one property at a time. 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. References: * Publication 523, Selling Your Home * Tax Topic 701, Sale of your Home - after May 6, 1997 * Tax Topic 703, Basis of Assets