Final answer:
To qualify for excluding gain from the sale of a principal residence, the taxpayer must have lived in the home as their primary residence for at least two out of the five years before selling, not necessarily at the time of sale. Investment in a house yields both financial returns, like capital gains, and nonfinancial returns like housing services.
Step-by-step explanation:
To be eligible to exclude gain on the sale of a principal residence, the taxpayer does not necessarily need to be using the home as a principal residence at the exact time of the sale. Instead, the Internal Revenue Service (IRS) requires that the taxpayer has used the home as their primary residence for at least two out of the five years preceding the sale. This rule is part of the Section 121 exclusion which allows individuals to exclude up to $250,000 of capital gains from the sale of a principal residence ($500,000 for married couples filing jointly) provided they meet the eligibility criteria.
Investment in a house provides the owner with both financial returns, such as capital gain from selling the house at a higher price than it was bought for, and nonfinancial returns, such as the utility of living in the house or 'housing services'. The value of this investment can be assessed through mechanisms like declared property values and the computation of tax obligations.