The simple answer is no (with one exception). Reinvesting the proceeds will not help you avoid paying taxes on the sale. Here are the most common scenarios:
- Selling your primary residence. If the home you are selling has been your primary residence for two of the last five years, you do not have to pay taxes on the first $250,000 ($500,000 if married) of the gain (aka profit) from the sale. Regardless of what you use the proceeds for. If you sold your primary residence before the two-year mark, you will need to pay taxes on the entire gain (there are some exceptions). For more info research “sale of primary residence exclusion” to learn more about the rules regarding this exclusion.
- Selling a rental or investment property. This is treated completely different than the sale of your primary residence. The only way to avoid, or defer, paying taxes on the gain is by doing what is called a 1031 exchange. You can defer paying capital gains by reinvesting the proceeds into a like-kind property within a certain amount of time. This is a fairly complicated process and it needs to be initiated BEFORE you sell your property. You should consult a real estate company that specializes in 1031 exchanges if this is something you are considering.
You will not be able to avoid paying taxes by using the proceeds from your rental property sale and using them towards either your existing primary residence or the purchase of a new primary residence.