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The background info....
I bought a house in LA in 1999. I moved to TX in 2001. I owner financed the house in LA at that time. The person that "bought" the house in LA didn't make payments in a timely fashion and I recently repo'ed it and re-sold it.

If I use the money from the sale of the LA house to pay for the house I am currently in, do I still pay capital gains?

Absolutely. The only way to avoid capital gains is to have owned and lived in the house as a principal residence for at least 2 of the last 5 years. Since you sold the house for the first time in 2001, you haven't owned it for 2 of 5 years. And if you moved to TX in 2001, you haven't used it as a principal residence.

That said, calculating your capital gains will be more complicated than usual. You should have been reporting some of the gain as you received payments from the first buyer. You might want to seek some professional help for this year's tax return.


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