The cost of improvements are added to the cost basis of the property when computing profit.

Selling expenses are also deductible against the profit by reducing the gain.

The IRS still has a 'selling your home' summary that shows what and how to adjust the cost basis and sale price to determine if any profit was made.

The amount of the downpayment is irrelevant when determining capital gains. You simply deduct the cost basis (purchase price + improvements + buying expenses such as loan fees, etc) from the net sales price (sales price minus any fixup costs, realtor fees, etc.).

If you end up with a postive number, you pay capital gains on that amount. If it is negative, you don't.

OK, in that case I probably still haven't shown a profit.

How are seller incentives handled? IE: I bought it at $341k, the closing costs (with FHA fee) were $16,000, but the seller paid $10,000 of those. Do I compute $16,000 in closing costs, or $6,000?

If the seller paid $10,000 of your closing costs, then your 'real' purchase costs were $341,000 - $10,000 plus your closing costs excluding down payment and pre-paids such as property taxes.

In case there's some confusion, 'Closing Costs' are fees and expenses related to the purchase -- title search, survey, etc. These are completely different from a 'Down Payment' which is an investment directly into your home equity, or pre-paid expenses where the title company collects your property taxes up front. Even though you fork over your down payment and pre-paids at closing, the numbers aren't related.

Definitely read the IRS publication and get help with it if you need to.

If this was your primary residence, the first $250,000 of capital gains on a house sale ($500,000 if you're married) are tax free. You owe no tax on the sale of your house. Don't even worry about it.

Oops sorry, just read the 3 month part; you can avoid capital gains taxes if your move is due to special circumstances. Your gain is pro-rated based on your occupancy period.

The $250,000/$500,000 capital gains exclusion I referenced above is for people who have used the house as a primary residence for 2 of the preceding 5 years.

Still, your net sales price ($375,000 minus broker fees, fix-up costs and other allowed net closing costs) minus your cost basis ($341,000 + $6000 in improvements + net closing costs) should mean a very low gain if anything at all.

"you can avoid capital gains taxes if your move is due to special circumstances."

The OP will still have to compute the capital gains to even determine if there are any.