Capital Gains and Equity Put In

[Jason L.]

This question has puzzled me for some time; oddly, I cannot find an answer. 

Hypothetical Scenario: I'm a newb in real estate and I purchase a property for $100,000. Over two years, I've put $20,000 in equity into the house via paying down the principal (no improvements). After these two years, I decide to sell the house. I will sell the house for $100,000 (same as what I bought for). When this transaction is done, I will be receiving $20,000 profit thereabouts (not considering closing costs, agent costs, etc).

So here is the question: Would I have to pay capital gains on this money I receive since it technically isn't "profit"; it was money I SPENT and am merely just getting back. How do I prove this to the IRS or would the IRS even know of this transaction?

How DOES the IRS know when you made money from the sale of a house?