We own a house in Pennsylvania. It is our only hose and our family home. We bought the house in Sept 2006. If we sell during 2007 will we have to pay US tax on any profit? What happens if we make a loss - is this tax deductable?:

Yes, and no. Given that the home is your principal residence, if you live in it for at least two years (out of the previous 5), you are exempt from paying capital gains on up to $500K in profit when you sell the house. But since you just moved into the house in 2006, if you sell in 2007 (i.e. prior to reaching the 2-year anniversary) you will owe capital gains taxes on any appreciation. So it all depends on the timing of the transaction.

However, if you have a loss on the sale of the home, you cannot claim the loss. That may not seem fair, but it's done this way because the house is considered personal property, not investment property.

I should have also noted that even if you sell the house prior to the 2-year anniversary, you may still be eligible for a tax break. If you sell because of certain circumstances such as change of job, change of health, or other unforeseen circumstance such as divorce, you can take a pro-rated portion of the $500K exclusion. For example, if you sell the house after 1 year due to one of these reasons, you don't pay taxes on the first $250K of profit (assuming married filing jointly).

Ebaines has covered all issues.