That is to get the 500k tax exemption. You must live in the home for 2 of the last 5 years. tlong is talking about how long an investment property must remain an investment property after a 1031 exchange before you can make it your primary residence, and as far as I know, he is correct: 2 years.
I believe that the reason for the $500,000 exemption is to not impose constraints on people that want to move. If for example, you bought a house for $250,000, watched it appreciate to $400,000, and wanted to then sell it and move to another state, you would be unable to purchase a simlarly-valued house. This, in turn, would constrain interstate commerce, by preventing people from finding jobs where they would be more productive and effective, and force them to stay in the same area when they didn't want to . . . which, theoretically, would probably bring down the demand for houses to begin with. Everyone who considers themselves upwardly mobile would just want to rent. One of the better advantages, though, is that you can turn a taxable debt into a tax-deductable debt by taking out a home equity loan when the value of your house exceeds what you paid for it. For example, if you buy your house for $300,000 and watch it increase in value to $350,000, you can get a home equity loan for $50,000 secured by the house, and use it to pay off a high-interest, non-deductable car or student loan. Heck, you can use it to pay off a credit card. That $50,000 loan would then be tax deductable. Advantages like that is why it is difficult to accurate value the advantage of owning a house. Still, though, all that is ancillary to the primary purpose of owning a house, which is having a nice, stable place to live.
