Your friend is thinking about a tax provision that was changed many, many years ago. You are almost right - -In general sellers can exclude from income up to $250,000 (for a single filer) and $500,000 (for joint return) in profit from the sale of a principal residence if they lived in that property for at least two years during the 5 year period ending on the date of the sale. There are a number of different tests/caveats/exceptions & computations that go into determining eligibility and profit/gain. For more info consult a tax adviser. Also, check the IRS website http://(www.irs.gov) and Publication 523 - "Selling Your Home."
On an Investment property, you can roll over any gains using a 1031 Tax Exchange ( or "Starker" exchange). There are limits on time to find and buy the new property, and definitions for 'like' properties. Definitely talk to a tax attorney.
On your Primary Residence, if you have inhabited it for 24 of the last 60 months ( please double check the time periods) then you do not have to pay taxes on any profit or equity growth, up to $250K for a single person, or $500K for a couple (again, various legal definitions for "couple")
ALSO, if you have used any portion of your Primary Residence as an office and have declared it to be one on your income taxes, then the formula becomes complex. You will need to speak to a tax attorney and will probably need all your documentation for the last 60 months.
Caveat: This is not legal advice, I am not an attorney, and you should certainly check with an attorney who specializes in taxes before proceding.
Aaron Smith, REALTOR
Both laws are still in affect, but only your rule would apply in this case.
Your friend is referring to what is called a 1031 exchange. A 1031 can only be done if you sold an investment property and are buying a new investment property. They don't work for primary residences.
What you are referring to is up to $250,000 (if single and up to $500,000 for a married couple) in gains being tax free for a homeowner selling their primary residence.
The gains don't have to be rolled into a new home.
I hope this was helpful, and again, he should speak to his tax pro.