taxes on house sale profits

What is the name of your state?PA & MD
Hi folks,
I understand that any profit upto $500,000 on the sale of a homeowner's principle residence is federal tax free. Does anyone know whether the profit from the sale of a second house is tax free. Basically my wife is selling the house she inherited from her deceased mother and we want to take the profit from the sale of this house and our house and put it all down on our next house so we can keep the mortgage low.
cheers,
Paddy

[JETX]

Originally Posted by paddyflan

Does anyone know whether the profit from the sale of a second house is tax free. Basically my wife is selling the house she inherited from her deceased mother

How has that house been used since she took ownership of it??
If it has been a rental or investment property, you cannot claim the exemption on it.

The following is from an IRS FAQ:
"I lived in a home as my principal residence for the first 2 of the last 5 years. For the last 3 years, the home was a rental property before selling it. Can I still avoid the capital gains tax and, if so, how should I deal with the depreciation I took while it was rented out?

If, during the 5-year period ending on the date of sale, you owned the home for at least 2 years and lived in it as your main home for at least 2 years, you can exclude up to $250,000 of the gain ($500,000 on a joint return in most cases). However, you cannot exclude the portion of the gain equal to depreciation allowed or allowable for periods after May 6, 1997. This gain is reported on Form 4797. If you can show by adequate records or other evidence that the depreciation allowed was less than the amount allowable, the amount you cannot exclude is the amount allowed. Refer toPublication 523 , Selling Your Main Home and Form 4797 (PDF), Sale of Business Property for specifics on calculating and reporting the amount of the eligible exclusion.

How do you report the sale of a second residence?

Your second home is considered a capital asset. Use Form 1040, Schedule D (PDF) to report sales, exchanges, and other dispositions of capital assets."
Source: [url]http://www.irs.gov/faqs/faq10.html[/url]