The answer to this question is complicated. When you receive profits on the sale of a home or property, these profits are considered taxable income by the government.
However, you have to factor in all other tax information such as your income, other profit gains, and the number of deductions and credits you have available.
Generally, for homeowners that are not in higher income brackets that are selling a house below the threshold of $250,000 for single filers (or $500,000 for couples), you will not have to worry about a capital gains profit pushing you into a higher tax bracket.
Do I have to pay capital gains tax if I reinvest?
You can earn investment income by investing in other properties. Once you sell your primary residence, you can keep the gains applicable and purchase a new primary residence. Every two years, you can apply the same strategy.
As far as reporting all of this, as long as your home sale gain is not over the limit, you don’t have any paperwork to file with the government.
Capital gains taxes are recognized when you make the sale of the property, and there is no deduction or credit for reinvesting the funds into other avenues (such as retirement account). There is some advantage to putting capital gains income into savings accounts, as this income is taxed at a rate much lower than most personal incomes.
There are certain scenarios where an individual can avoid capital gains taxes. For example, if the property you purchased increased in value every year since you purchased it.
In addition, if you have not sold or exchanged a home in the last 5 years, you likely can deduct up to $250,000 in capital gains (or up to $500,000 for a married couple), but there are certain restrictions and you should check with the IRS website here.
Finally, if you have carried forward a net loss or have a net capital loss for the year that exceeds your capital gains profit, these are also scenarios where you may be able to reduce the burden of your capital gains profit.