Final answer:
Taxpayers who meet specific home ownership and use criteria can exclude up to $250,000 ($500,000 for married filing jointly) of gain from the sale of their principal residence from capital gains tax. To be eligible, they must have owned and lived in the home for at least two years out of the last five before selling it.
Step-by-step explanation:
Taxpayers who meet certain home ownership and use requirements may take advantage of a significant tax benefit when selling their principal residence. Specifically, individuals are able to exclude up to $250,000 ($500,000 for married couples filing jointly) of capital gains from their income. To qualify for this exclusion, the taxpayer must have owned and used the home as their principal residence for at least two of the five years preceding the sale.
This provision in the tax code is beneficial as it allows homeowners to build equity and accumulate wealth without the immediate tax burden that usually accompanies capital gains. It encourages home ownership and investment in residential property. However, if the home was not used as a principal residence for the required period, or the gain exceeds the allowable exclusion, the capital gains on the sale may be subject to taxation.