Real-life numbers will differ, but that's roughly the point.
But there is a gain, you just turned an illiquid asset into a liquid asset. The fact that this exchange is even possible is why you are even able to say "its worth $2M" in the first place. If you couldn't turn an illiquid asset into a liquid asset it would be worth nothing, so you neither "gain" nor "lose". Would you rather have that scenario?
Lastly - if you see personal value in purchasing a smaller house, wouldn't you expect service providers (agents, movers, etc) to charge you for that value?
https://ttlc.intuit.com/questions/3229450-sold-primary-house...
https://www.irs.gov/taxtopics/tc701
Where's your source?
If you think that's incorrect, what do _you_ think happens with taxes when selling a home for $2 million that was bought for $1 million?
> I said = 2017 - Buy new house for $1M
> you said = But it might be (for the "buy new house") $1.6 million, not $1 million, in your example...
> I said = so they can still afford it.
> you said = You don't get to keep the whole $2M. That's the point.
So, let's do this again.
1. Sell house for $2M
2. Buy house for $1.6M as you suggested
3. Congrats you now have $1.6M in illiquid assets and $400k in liquid assets (cash)
Note - I recognize that my original example was buy at $1M and sell for $2M, where you are correct you're not taxed on the first $500k and the remaining $500k is taxed at capital gains. I also recognize that this whole scenario is purely illustrative and doesn't take into acount all of the transation fees.