It is legal, but you might be doing something wrong, or just looking at the results wrong. The postponed gain on the home that you sold in 1985 would increase your tax now, not decrease it.
The only mention of the postponed gain in Pub. 523 is buried on line 5l of Worksheet 2 on page 13, "Any gain you postponed from the sale of a previous home sold before May 7, 1997." You can see this in the image that JohnB5677 posted.
If you used the EasyGuide in TurboTax to calculate the basis of the home that you sold in 2022, it asked you the amount of gain that you "rolled over" from the home that you sold in 1985. That would be the amount from your 1985 Form 2119, line 13, "Gain to be postponed."
The postponed gain is subtracted from the original purchase price of the home you sold in 2022. That decreases your basis, which increases your gain on the sale.
Another way of looking at it is that your taxable gain now is the actual gain on the home you sold in 2022, plus the postponed gain from 1985.
If your taxable gain, after adjusting for the postponed gain, is more than the $250,000 that you can exclude, the postponed gain has increased your taxable gain, so it has increased your 2022 tax.
One other factor that might come into play is that the gain on your home is long-term capital gain. If your total income, including the gain on the home, is quite low, it's possible that some or all of the gain is being taxed at 0%. The income cutoff for the 0% rate depends on your total taxable income, the amount of the taxable gain, and your filing status. It could also be affected by any other long-term capital gains or qualified dividends that you have.
