Section 121 of the Internal Revenue Code provides for an exclusion of up to $500,000 of gain for a married couple from the sale of their principal residence. Section 1.121-1(b) of the Regulations to this code section provides that a facts and circumstances test will be used to determine whether or not property is used as the taxpayer's principal residence. If a taxpayer alternates between two properties, using each as a residence for successive periods of time, the property that the taxpayer uses a majority of the time during the year will ordinarily be considered the taxpayer's principal residence. Your gain is based not on the value, but the gain...which is the sale price less (what you paid for the house plus the cost of any improvements you made to the house). You only need to use this house as your principal residence for an aggregate of 2 years of the preceding 5 years before the sale.
As this is a "facts and circumstances" situation, it's up to you to make the determination; given how you framed your facts, this home wouldn't fall within the definition of your principal residence. If, in evaluating your situation, you think you can come up with an aggregate of 2 years (doesn't have to be consecutive) you could claim this exclusion and exclude up to $500,000 in gain. Given that you have taken advantage of this exclusion previously, your likelihood of getting audited is very small in any case.
For any gain not excluded, the Federal tax laws concerning taxation of long term capital gains are as follows:
0% applies to long-term gains and dividend income if a person is in the 10% and 15% tax brackets,
15% applies to long-term gains and dividend income if a person is in the 25%, 28%, 33%, or 35% tax brackets, and
20% applies to long-term gains and dividend income if a person is in the 39.6% tax bracket.
In addition, starting in 2013, capital gain income became subject to an additional 3.8% Medicare tax for taxpayers with income at or above a certain threshold. This 3.8% Medicare surtax applies to taxpayers with “net investment income” in excess of threshold income amounts of $200,000 for single filers and $250,000 for married couples filing jointly.
Thank you so much for allowing me to help you with your questions. I have done my best to provide information which fully addresses your question. If you have any follow up questions, please ask! If I have fully answered your question(s) to your satisfaction, I would appreciate you rating my service as Good or Excellent (hopefully Excellent). Otherwise, I receive no credit for assisting you today. I thank you in advance for taking the time to provide me a positive rating!