Question:   If I sell my home and use the money I receive to pay off the mortgage, do I have to pay taxes on that money?

Answer:   The money you receive from the sale of your home is part of your amount realized on the sale, even if the money is used to pay off the mortgage.  If your amount realized, which generally includes any cash or other property you receive, plus any indebtedness assumed or paid off by the buyer, minus your selling expenses, exceeds your adjusted basis in your home, you have a gain on the sale.  Your adjusted basis is generally your home’s cost plus any capital improvements (if you financed the purchase of the house by obtaining a mortgage, the mortgage proceeds are included in determining your cost basis in your residence). 

You may be able to exclude from income all or a portion of the gain on your home sale.  If you can exclude all of the gain, you do not need to report the sale on your tax return.  To determine the amount of the gain you can exclude from income or for additional information on selling your home, refer to Publication 523, Selling Your Home.  Any gain that you cannot exclude must be reported as income on your return.