How will the sale of a house affect my state and federal taxes?

If you sold your primary personal residence and you lived in and owned the home for at least two years in the five year period on the date of sale, you do not have to report the sale if your gains are less then the exclusion amounts of $250,000 if filing Single or $500,000 if filing Married Filing Jointly (and both lived in the home for two years).

Gain or Loss = Sales Price minus Sales Expenses minus Adjusted Basis (Purchase Price plus the cost of improvements prior to the sale)

If you had a gain greater then the exclusion amounts then you would have to report the sale. Also, if you received a Form 1099-S for the sale either with a gain or a loss, the sale has to be reported.

To clarify, if you have to report the sale because you received a Form 1099-S, you can still claim the exclusion of gain on your tax return if you qualify for the exclusion. Having to report the sale does not change your tax.

If you sell your personal home at a loss, you cannot claim the loss. You would still have to report the sale if you received a 1099-S.

The preceding, and DoninGA's post above, apply to federal tax. How the sale affects your state tax depends on what state the house is in and what state you are living in when you sell it. Every state has different rules.

The answer to your question will be completely different if the house that you sell is something other than your primary home, such as a second home, a rental property, etc.