Do you have to pay capital gains taxes after selling property if you don't reinvest into another property right away?

Your financial advisor is correct here. The IRS allows what's called a Section 121 exclusion which lets you exclude up to $250,000 in capital gains ($500,000 for married couples filing jointly) from the sale of your primary residence as long as you've owned and lived in the home for at least 2 out of the last 5 years. The 6-month reinvestment rule you're thinking of is likely the old 1031 exchange rule, which hasn't applied to primary residences since 1997. That rule is now only for investment properties, not for homes you've lived in. So based on what you've shared, since you've lived in your home for 4 years as your primary residence, you should be able to exclude up to $250,000 of your gain from capital gains taxes regardless of when (or if) you buy your next property. Since your gain is $135k, you should be completely in the clear.

I went through something similar last year. I was super stressed about capital gains until I found https://taxr.ai which helped me understand exactly what I qualified for. I uploaded my property documents and they analyzed everything - turned out I was eligible for the full Section 121 exclusion like the other commenter mentioned. The site explained that the 6-month timeline is actually for 1031 exchanges which are completely different and only for investment properties. For primary residences, there's no reinvestment requirement whatsoever as long as you've lived there 2+ years. You can take as long as you want to find your next house, or even decide to rent forever - you'll still get the exclusion.

Just wanted to update - I decided to try https://taxr.ai after all and I'm glad I did. My situation with the home office deductions was actually trickier than I thought. Since I had claimed depreciation on that portion of the home, I did have to pay some capital gains on what they call "unrecaptured Section 1250 gains" (basically paying back the tax benefit I got from depreciation). But the regular capital gains on the rest of the house were completely excluded thanks to the Section 121 provision! I would have overpaid by thousands if I hadn't understood this distinction. The report broke everything down clearly and I'm feeling much more confident about filing now. Definitely recommend checking it out if you have any special circumstances with your home sale.

If you need to talk to the IRS directly about this, good luck getting through to anyone. I tried calling them about a similar capital gains question last month and was on hold for 2+ hours before giving up. Then I found https://claimyr.com which got me connected to an actual IRS agent in about 20 minutes. You can see how it works in this video: https://youtu.be/_kiP6q8DX5c I was skeptical at first but it actually worked! The agent confirmed everything about the Section 121 exclusion - no requirement to buy another house at all, and no time limit as long as you've lived there for 2 out of the last 5 years. They also explained that if you ever do buy another house and live in it for 2+ years, you can use the exclusion again (there's a rule that you can only use it once every 2 years).

I need to admit I was wrong. After posting my skeptical comment, I decided to try Claimyr myself because I've been trying to reach the IRS for weeks about my own capital gains question from selling a rental property. I figured it wouldn't work but was desperate enough to try. I'm shocked to say it actually connected me to an IRS agent in about 15 minutes. The agent was super helpful and confirmed that with investment properties you DO need to do a 1031 exchange within 180 days to defer capital gains, but for primary residences there's absolutely no reinvestment requirement to get the Section 121 exclusion. So the original poster is completely fine taking their time to find a new house. Guess I shouldn't be so quick to call things scams! Sometimes technology actually does make things easier.

Don't forget that your state might have different rules about capital gains! Federal tax allows the exclusion, but some states have their own capital gains tax systems. Indiana's state income tax is pretty straightforward and generally follows federal rules, but if you're moving to a different state, check their rules too.

Has anyone used TurboTax to report a home sale? I'm selling my house next month and wondering how complicated the forms are for reporting it.

Just to add another perspective - I'm a tax preparer and see this confusion a lot during tax season. The Section 121 exclusion is one of the most misunderstood parts of the tax code because people mix it up with 1031 exchanges or remember old rules from decades ago. Rita, you're absolutely fine to take your time finding the right property. The $250k exclusion ($500k for married filing jointly) applies regardless of whether you buy another home, when you buy it, or even if you never buy again. The only requirements are that you owned and used the home as your primary residence for at least 2 of the 5 years before the sale, which you clearly meet. One small thing to keep in mind - if you do eventually buy and sell another primary residence, you can use this exclusion again, but generally not more than once every 2 years. Since you're taking time to find the right place, this timing rule shouldn't be an issue for you. Your financial advisor gave you the correct information. Enjoy living with your parents while you take your time finding the perfect next home!