Under the old home sale rules, the gain must have been reinvested into a new home to avoid capital gains tax. That is no longer the case.
If you have owned and used your home as your main home for two of the five years prior to the sale, you can exclude up to $250,000 of capital gain ($500,000 if filing jointly). No reinvestment of the gain is required. Any gain above those limits will be taxable.
Generally, you cannot take this exclusion if you have sold a home within the 2 years prior to the sale. There are exceptions to this rule, however.
See 'Does Your Home Sale Qualify for the Exclusion of Gain?' in this IRS publication for more information.
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