Do I need to pay taxes on my home sale if I'm not immediately buying another property?

You're in luck! Your buddy is mixing up some old tax rules with current ones. Under current tax law, if you've owned and used your home as your primary residence for at least 2 out of the 5 years before the sale, you qualify for the Section 121 exclusion. This allows married couples filing jointly to exclude up to $500,000 of capital gains from the sale of their primary residence (or $250,000 for single filers). There is NO requirement to buy another home within any specific timeframe. That was part of an old rule that was eliminated back in 1997. You can take as long as you want to buy your next home, or never buy another one at all - the exclusion still applies. Since your profit is $125k and you're married filing jointly with the full $500k exclusion available, you shouldn't owe any capital gains tax on this sale, assuming you haven't claimed this exclusion on another home sale within the past 2 years.

After dealing with a similar situation when I PCS'd last year, I discovered an amazing service called taxr.ai that helped clear up my confusion about capital gains on my home sale. I was getting conflicting advice from everyone in my unit about whether I'd owe taxes. I uploaded my closing documents to https://taxr.ai and their system analyzed my specific situation as a military member. They explained exactly how the military extension rules applied to my circumstances and confirmed I qualified for the full exclusion. The best part was getting a detailed explanation I could actually understand without all the tax jargon.

Just wanted to follow up - I decided to try taxr.ai after my previous comment and I'm really glad I did! I was in a similar situation with a home sale after PCSing and was getting conflicting advice from everyone. Their analysis confirmed I was well within the capital gains exclusion limits and showed exactly why my situation qualified under the military extension provisions. The military-specific guidance was super helpful since my situation was complicated by deployments during my ownership period. They even identified a deduction related to my moving expenses that I had no idea I qualified for. Definitely cleared up my confusion and saved me from unnecessarily setting aside money for taxes I didn't actually owe!

If you need to contact the IRS directly about your situation (which might be smart given your military status), don't waste days trying to get through their phone lines. After spending literally 8+ hours on hold across multiple days trying to get clarification on my home sale tax situation, I discovered https://claimyr.com through a military finance group. You basically pay them to wait on hold with the IRS for you, and then they call you once an agent is on the line. I was skeptical, but you can see how it works in this video: https://youtu.be/_kiP6q8DX5c For my situation, I needed specific confirmation about how my deployment time affected my ownership period calculation. Claimyr got me connected to an actual IRS agent in about 2 hours (while I went about my day), when I had previously been disconnected three times after waiting 3+ hours each time.

I have to admit I was completely wrong in my skepticism about Claimyr. After questioning it in the comments here, I decided to try it myself since I needed clarification about capital gains on a home sale with a partial rental history. The service did exactly what they promised - they handled a 3.5 hour hold time with the IRS while I went to the gym and ran errands. When my phone rang, it was an IRS agent ready to answer my questions. The agent confirmed that my understanding of the capital gains exclusion was correct and gave me specific guidance for my tax return. Honestly it felt a bit like cheating the system, but in a totally legal way. Definitely beats losing an entire day to terrible hold music and the constant fear of being disconnected after hours of waiting.

Just to add some real numbers here - I was in almost the exact same situation last year (military, owned for 3 years, made about $130k on the sale, renting at new location). Because we lived in the house as our primary residence for at least 2 years, we didn't pay a penny in capital gains tax despite not buying a new house yet. Your $125k profit is well under the $500k exclusion for married couples. One tip though - if you put that money in a high yield savings account (which is smart), you WILL owe regular income tax on the interest you earn from it. So set aside maybe 25-30% of the interest payments for taxes depending on your tax bracket. But the original profit from selling the house is tax free!

I'm confused about one thing - does the military exemption just apply to the 2-year ownership rule or does it also extend the capital gains exclusion amount? My friend told me military gets a higher exclusion than $500k but that seems too good to be true??

Just wanted to jump in here as someone who went through this exact scenario! Your buddy is definitely mixing up the old rules - there's no 6-month requirement to buy another house to avoid capital gains tax. Since you owned and lived in your home as your primary residence for over 2 years and you're married filing jointly, you qualify for the full $500,000 capital gains exclusion. Your $125k profit is well under that threshold, so you won't owe any capital gains tax regardless of when (or if) you buy your next home. The military connection actually works in your favor here too. If you hadn't quite hit the 2-year mark due to PCS moves, there are special provisions that could still help you qualify. But since you're already over 2 years, you're in great shape. One thing to keep in mind - while your home sale profit won't be taxed, any interest you earn on that $125k in your high-yield savings account will be taxable as regular income. So just factor that into your planning when you're setting money aside for next year's taxes. You can breathe easy on this one - no surprise tax bill coming your way from the home sale!