Final answer:
The tax benefits of owning a principal residence typically include capital gains exclusion, which is not excluded, but rather a primary benefit, allowing significant tax savings under certain conditions.
Step-by-step explanation:
The tax benefits of a principal residence include several advantages, but one that is excluded is capital gains exclusion, which is actually a primary benefit. When you sell your principal residence, the IRS allows individuals to exclude up to $250,000 ($500,000 for married couples) of capital gains from their income, provided certain conditions are met such as owning and using the home as your main residence for at least two out of the five years before the sale.
This capital gains exclusion is one of the most substantial tax benefits associated with homeownership. As an investment, a house not only can offer a financial return in the form of capital gains when you sell it but also provides a nonfinancial return, such as the utility of having a place to live, which is termed as 'housing services'. The potential capital gains represent the increase in the value of the home over the time you own it.
Importantly, low capital gains taxes encourage investment in property and can foster economic growth. However, should there be a situation where the capital gains exceed the exclusion limits, that excess may be subject to taxation. Therefore, understanding these tax implications is crucial for homeowners planning to sell their property.