Im confused about capital gains tax?

for a primary residence, if you live in it for 2 years, then sell it you can get up to 250,000 tax free. does that mean you can keep the money and do whatever you want? or do you HAVE to re invest it in real estate?

same thing for investment properties, if you pay the full 15% for captial gains, can you keep the rest? or does it HAVE to be reinvested in real estate?

my mom said if you have investment properties and sell them and make money, that HAS to be reinvested in real estate.
* my mom is not an investor or a professional and i think she does now know whats shes talking about but i want to make sure.

For your primary residence, as long as you meet the rules (generally living in and owning the home for 2 of the last 5 years), you can exempt up to $250k ($500k if married filing jointly and you both meet the rules) in capital gains from taxes. There are no restrictions on what you can spend you gains on. Details are in IRS Publication 523 - Selling Your Home: http://www.irs.gov/pub/irs-pdf/p523.pdf

If you sell investment property for a gain, you have two options. If you want to re-invest in more real estate, you may set up a 1031 like-kind exchange, in which you invest your profit back into more real estate. This must be set up BEFORE you sell the property, as you can never have the money in your possession, and you also must reinvest the money within a certain timeframe.

Your other option is to pay the capital gains taxes on it. If you pay the taxes, there is no restriction on what you spend the money on.

Up until about 10 years ago, there was a law that required you to pay capital gains taxes on any gains you received when selling your primary home, unless you purchased another home of equal or greater value within 2 years. This may be the rule that you mother was thinking of.

1-no, keep the money

2-yes, after taxes, the rest is yours

3-no, you never have to reinvest, but you do pay cap gains on your profits.

Anwswer for both questions is YES, you can do whatever you would like with the sale proceeds, provided you paid any capital gains tax that was due. In the case of investment/rental property, you may be able to avoid paying capital gains tax by use of a IRS code section 1031 exchange; in simple terms, you invest the proceeds of a sale into another rental property that costs the same or more than the property you sold. Ditto for sale of residential property (if you are fortunate to have that amount of a gain!). Talk to an accountant for more details and clarification.

1. For your first question, you do not have to pay taxes on the $250,000 (single) and up to $500,000 if you are married if you lived in the home for at least two to five years and it was your primary residence. This is not a one time election it can be used multiple times as long as you live in each home two to five years and it is your primary residence.

2. You can keep the rest of the money in investment property after yo pay taxes, however, you might want to take advantage of a 1031 exchange in which you purchase another investment property with the proceeds and defer taxes. This builds up equity. Some people use this strategy to trade up investment properties and then eventually use their last investment property as their final residence. This way they can use the two to five year primary residence option and not pay any taxes or limited taxes.

Good luck.