Can we use funds from our sold primary home to buy a second piece of property, or must the funds be applied to the primary residence’s mortgage?

by Joseph P. Cunningham, CPA | Aug 05, 2019

We purchased a home on land that we lived on for 10 years. The home and property were destroyed by wildfire. The mortgage was paid off by insurance and we own the land free and clear. After the fire we moved to a different state and purchased a home, which is our primary residence. The property will be sold for about $100,000 less than we originally paid for the home and property. What are the tax implications? Can we use those funds to buy a second piece of property or small fixer-upper home? Or do we need to apply those funds directly to the mortgage for our primary residence?

The sale proceeds will be used to satisfy the mortgage on the property. Any monies after the sale can be applied to another home. Any deferred gain from the first property will reduce the loss on the sale of the second property. You may exclude up to $500,000 in gain if you are married and filing jointly.

See IRS Publication 523 for further details or seek a competent tax professional to assist you. 

For more resources, check out PICPA’s Money & Life Tips, Ask a CPA, or CPA Locator.

Answered by: Joseph P. Cunningham, CPA, is an associate professor at Wilson College in Chambersburg, Pa.

The responses are based on the limited information provided by the questioner and apply the laws and regulations at the time of posting. Other options could arise as rules and regulations may change over time, including but not limited to the passage of the Tax Cuts and Jobs Act of 2017. They are intended to provide general information, not specific accounting or tax advice; they are not intended or written to be used and cannot be used for the purpose of avoiding or evading taxes or penalties under the IRS code or regulations. Views expressed do not imply an opinion of the PICPA, its officers, directors, employees, or members.
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