What is 121 exclusion? For federal, doesn't matter that you bought the new house first....
For a primary home, if you owned and lived in your house for 2 out of the last 5 years when you sell you can exclude the gain up to $250,000 for single or 500,000 for married from tax. You can not take a loss on your tax return. If you made more than a 250,000 (500,000 for joint) gain then the amount over it is taxed. Doesn't matter what you did with the proceeds like buy another house or pay off the mortgage
IRS pub 523 house sale. Figuring Gain or Loss on page 8.
http://www.irs.gov/pub/irs-pdf/p523.pdf
