Why am I paying capital gains on my home sold when I turned the profit into my new home?

[Bsch4477]

Investing a profit from one home into another does not affect your tax liability for the gain on the first one. You may be confusing your situation with a 1031 exchange which applies to rental property. 

[xmasbaby0]

The law that allowed you to avoid capital gains if you used the gain to purchase another home was changed as of 1997.

If your gain was more than  $250,000 filing Single, or more than $500,000 filing Married Filing Jointly the sale must be reported on your tax return.  Whether you re-invested the gain in to another house is irrelevant.  If you  have a Form 1099-S go to Federal>Wages and Income>Less Common Income>Sale of Home (gain or loss)

If you owned and lived in the home as your primary residence for at least 2 of the last 5 years on the date of the sale, you do not have to report the home sale if the gain is less than $250K filing Single, or less than $500K filing Married Filing Jointly (and you both owned and lived in the home for at least 2 years).

• If you are using online TT, you need Premier or Self-Employed software to report the 1099-S
• .https://ttlc.intuit.com/questions/1901135-i-sold-my-home-at-a-loss-is-this-deductible

[KrisD15]

Whether capital gains are applied to a home sale is based on you owning and living in the home at least 2 of the last 5 years, not what you did with the funds after the sale. 

A 1031 exchange can be done with investment real estate only and needs to be arranged before closing. 

There was a time when a homeowner could defer capital gains by purchasing a home that was of greater value than the one they sold, but that ended in 1997. 

Link

[Mike9241]

that provision was removed from the Internal Revenue Code many years ago.  however, if you owned the home long enough or sold for certain reasons there is a $250,000 exclusion (double that if filing jointly and certain additional conditions are met). 

[Ed golf]

Is there a limit like 2,4, 6 months for me to close on my new home after I sold my current home? 

[SweetieJean]

For tax purposes, no.

[Mike9241]

the deferral of gain from the sale of one home and the purchase of another is no longer in the Internal Revenue code. take as long as you want. 

[Ed golf]

Thanks for replying. 

let me rephrase. If I sell my home tomorrow for 850,000 that I bought originally for 175,000 8 years ago. I netted after commissions, property taxes etc  something like a 580,000 gain. My wife and I are currently looking in a new city and it could be months before we find and close on a new place that will likely be more expensive than what we sold our house for. Does the IRS give you unlimited time to reinvest?

[Ed golf]

Thanks for replying…I know the IRS always wants what’s coming to them. What’s preventing me from renting and sitting on this gain for a couple of yrs. Got to be sometime the IRS will come a knocking 

[VolvoGirl]

You mean renting out the prior house?  That can work.

If you sell, it doesn't matter what you do with the proceeds or gain.  You have to report it the year you sell it.

The old rule about rolling it over to a new house stopped in 1997.  

If you sold your Main Home see,

https://ttlc.intuit.com/community/home-ownership/help/is-the-money-i-made-from-a-home-sale-taxable/0...

It's based on the date of sale.

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.

[NCperson]

@Ed golf  

<<If I sell my home tomorrow for 850,000 that I bought originally for 175,000 8 years ago. I netted after commissions, property taxes etc  something like a 580,000 gain>>

assuming you and spouse lived in the home for 2 of the last 5 years, then you would pay capital gains tax on $80,000 of the gain THIS YEAR.   There is no rollover of the gain to the next house - that went 'out the window' many, many years ago.  You are eligible for a $500,000 exclusion on the gain, which is why you'd only pay tax on $80,000 of long term gain in your example.

<<What’s preventing me from renting and sitting on this gain for a couple of yrs. Got to be sometime the IRS will come a knocking >>

At closing, the attorney is required to report the sale to the IRS if the sales price is over $500,000 (since it's a married couple selling) and send you a Form 1099-S at the end of the year.  You are required to report that 1099-S on your tax return (as the IRS got a copy also, they are expecting it).  So the IRS will "come a knocking' pretty quickly because the attorney reported the sale to them.

Again, the concept of 'rolling over the gain' is no longer part of the tax code, so if you want to rent the rest of your life, the IRS will have received anything from you because of the 1099-S that was reported to them in the year of sale. 

[Hal_Al]

Q.  Is there a limit like 2,4, 6 months for me to close on my new home after I sold my current home? 

A. No.

Q. If I sell my home tomorrow for 850,000 that I bought originally for 175,000 8 years ago. I netted  something like a 580,000 gain.  Does the IRS give you unlimited time to reinvest?

A.  Simple answer: Yes.  More accurately, there is no requirement to reinvest.  The new law allows you to not pay tax on the first $500,000 (married jointly) of gain, regardless of what you do with the money. You must simply have owned and lived in the home for a minimum of 2 years out of the 5 years prior to the sale. 

Q. What’s preventing me from renting and sitting on this gain for a couple of yrs.

A. You have to report  $80,000 of the gain, the year you sell the property.  The first $500,000 is tax free.

Q. Got to be sometime the IRS will come a knocking?

A.  Yes, the year you sell it, whether or not you bought a new home.   You report the entire $580,000 gain; then claim a $500,000 adjustment (home sale exclusion), for a net reportable gain of $80,000. 

[elimud]

Hello, our gain was less than $500,000 (MUCH less - like around 25,000) and we lived in the home continuously for 35 years. But we did deduct part of the home for a home business. Is that why Turbo Tax is saying we have to pay capital gains? Thanks.

[JamesG1]

If the home was used for business purposes, there may be depreciation recapture reported on your tax return.

The depreciation will be recaptured on IRS form 4797 Sale of Business Property.  See Instructions page 3 here.

Sale of Home Used for Business 

If you sold property that was your home and you also used it for business, you may need to use Form 4797 to report the sale of the part used for business (or the sale of the entire property if used entirely for business). 

Gain or loss on the sale of the home may be a capital gain or loss or an ordinary gain or loss. Any gain on the personal part of the property is a capital gain. 

@elimud