EXEMPTION FROM TAX FOR GAIN ON SALE OF PRINCIPAL RESIDENCE.

SEC. 312. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRINCIPAL RESIDENCE. (a) In General.—Section 121 (relating to one-time exclusion of gain from sale of principal residence by individual who has attained age 55) is amended to read as follows: “SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE. “(a) Exclusion.—Gross income shall not include gain from the sale or exchange of property if, during the 5-year period ending on the date of the sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence for periods aggregating 2 years or more. “(b) Limitations.— “(1) In general.—The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000. “(2) $500,000 limitation for certain joint returns.—Paragraph (1) shall be applied by substituting ‘$500,000’ for ‘$250,000’ if— “(A) a husband and wife make a joint return for the taxable year of the sale or exchange of the property, “(B) either spouse meets the ownership requirements of subsection (a) with respect to such property, “(C) both spouses meet the use requirements of subsection (a) with respect to such property, and “(D) neither spouse is ineligible for the benefits of subsection (a) with respect to such property by reason of paragraph (3). “(3) Application to only 1 sale or exchange every 2 years.— “(A) In general.—Subsection (a) shall not apply to any sale or exchange by the taxpayer if, during the 2-year period ending on the date of such sale or exchange, there was any other sale or exchange by the taxpayer to which subsection (a) applied. “(B) Pre-may 7, 1997, sales not taken into account.—Subparagraph (A) shall be applied without regard to any sale or exchange before May 7, 1997. “(c) Exclusion for Taxpayers Failing to Meet Certain Requirements.—111 STAT. 837 “(1) In general.—In the case of a sale or exchange to which this subsection applies, the ownership and use requirements of subsection (a) shall not apply and subsection (b)(3) shall not apply; but the amount of gain excluded from gross income under subsection (a) with respect to such sale or exchange shall not exceed— “(A) the amount which bears the same ratio to the amount which would be so excluded under this section if such requirements had been met, as “(B) the shorter of— “(i) the aggregate periods, dining the 5-year period ending on the date of such sale or exchange, such property has been owned and used by the taxpayer as the taxpayer’s principal residence, or “(ii) the period after the date of the most recent prior sale or exchange by the taxpayer to which subsection (a) applied and before the date of such sale or exchange, bears to 2 years. “(2) Sales and exchanges to which subsection applies.—This subsection shall apply to any sale or exchange if— “(A) subsection (a) would not (but for this subsection) apply to such sale or exchange by reason of— “(i) a failure to meet the ownership and use requirements of subsection (a), or “(ii) subsection (b)(3), and “(B) such sale or exchange is by reason of a change in place of employment, health, or, to the extent provided in regulations, unforeseen circumstances. “(d) Special Rules.— “(1) Joint returns.—If a husband and wife make a joint return for the taxable year of the sale or exchange of the property, subsections (a) and (c) shall apply if either spouse meets the ownership and use requirements of subsection (a) with respect to such property. “(2) Property of deceased spouse.—For purposes of this section, in the case of an unmarried individual whose spouse is deceased on the date of the sale or exchange of property, the period such unmarried individual owned and used such property shall include the period such deceased spouse owned and used such property before death. “(3) Property owned by spouse or former spouse.—For purposes of this section— “(A) Property transferred to individual from spouse or former spouse.—In the case of an individual holding property transferred to such individual in a transaction described in section 1041(a), the period such individual owns such property shall include the period the transferor owned the property. “(B) Property used by former spouse pursuant to divorce decree, etc.—Solely for purposes of this section, an individual shall be treated as using property as such individual’s principal residence during any period of ownership while such individual’s spouse or former spouse is granted use of the property under a divorce or separation instrument (as defined m section 71(b)(2)).111 STAT. 838 “(4) Tenant-stockholder in cooperative housing corporation.—For purposes of this section, if the taxpayer holds stock as a tenant-stockholder (as defined in section 216) in a cooperative housing corporation (as defined in such section), then— “(A) the holding requirements of subsection (a) shall be applied to the holding of such stock, and “(B) the use requirements of subsection (a) shall be applied to the house or apartment which the taxpayer was entitled to occupy as such stockholder. “(5) Involuntary conversions.— “(A) In general.—For purposes of this section, the destruction, theft, seizure, requisition, or condemnation of property shall be treated as the sale of such property. “(B) Application of section 1033.—In applying section 1033 (relating to involuntary conversions), the amount realized from the sale or exchange of property shall be treated as being the amount determined without regard to this section, reduced by the amount of gain not included in gross income pursuant to this section. “(C) Property acquired after involuntary conversion.—If the basis of the property sold or exchanged is determined (in whole or in part) under section 1033(b) (relating to basis of property acquired through involuntary conversion), then the holding and use by the taxpayer of the converted property shall be treated as holding and use by the taxpayer of the property sold or exchanged. “(6) Recognition of gain attributable to depreciation.—Subsection (a) shall not apply to so much of the gain from the sale of any property as does not exceed the portion of the depreciation adjustments (as defined in section 1250(b)(3)) attributable to periods after May 6, 1997, in respect of such property. “(7) Determination of use during periods of out-of-residence care.—In the case of a taxpayer who— “(A) becomes physically or mentally incapable of selfcare, and “(B) owns property and uses such property as the taxpayer’s principal residence during the 5-year period described in subsection (a) for periods aggregating at least 1 year, then the taxpayer shall be treated as using such property as the taxpayer’s principal residence during any time during such 5-year period in which the taxpayer owns the property and resides in any facility (including a nursing home) licensed by a State or political subdivision to care for an individual in the taxpayer’s condition. “(8) Sales of remainder interests.—For purposes of this section— “(A) In general.—At the election of the taxpayer, this section shall not fail to apply to the sale or exchange of an interest in a principal residence by reason of such interest being a remainder interest in such residence, but this section shall not apply to any other interest in such residence which is sold or exchanged separately. “(B) Exception for sales to related parties.—Subparagraph (A) shall not apply to any sale to, or 111 STAT. 839exchange with, any person who bears a relationship to the taxpayer which is described in section 267(b) or 707(b). “(e) Denial of Exclusion for Expatriates.—This section shall not apply to any sale or exchange by an individual if the treatment provided by section 877(a)(1) applies to such individual. “(f) Election To Have Section Not Apply.—This section shall not apply to any sale or exchange with respect to which the taxpayer elects not to have this section apply. “(g) Residences Acquired in Rollovers Under Section 1034.—For purposes of this section, in the case of property the acquisition of which by the taxpayer resulted under section 1034 (as in effect on the day before the date of the enactment of this section) in the nonrecognition of any part of the gain realized on the sale or exchange of another residence, in determining the period for which the taxpayer has owned and used such property as the taxpayer’s principal residence, there shall be included the aggregate periods for which such other residence (and each prior residence taken into account under section 1223(7) in determining the holding period of such property) had been so owned and used.”. (b) Repeal of Nonrecognition of Gain on Rollover of Principal Residence.—Section 1034 (relating to rollover of gain on sale of principal residence) is hereby repealed. (c) Exception From Reporting.—Subsection (e) of section 6045 (relating to return required in the case of real estate transactions) is amended by adding at the end the following new paragraph: “(5) Exception for sales or exchanges of certain principal residences.— “(A) In general.—Paragraph (1) shall not apply to any sale or exchange of a residence for $250,000 or less if the person referred to in paragraph (2) receives written assurance in a form acceptable to the Secretary from the seller that— “(i) such residence is the principal residence (within the meaning of section 121) of the seller, “(ii) if the Secretary requires the inclusion on the return under subsection (a) of information as to whether there is federally subsidized mortgage financing assistance with respect to the mortgage on residences, that there is no such assistance with respect to the mortgage on such residence, and “(iii) the full amount of the gain on such sale or exchange is excludable from gross income under section 121. If such assurance includes an assurance that the seller is married, the preceding sentence shall be applied by substituting ‘$500,000’ for ‘$250,000’. The Secretary may by regulation increase the dollar amounts under this subparagraph if the Secretary determines that such an increase will not materially reduce revenues to the Treasury. “(B) Seller.—For purposes of this paragraph, the term ‘seller’ includes the person relinquishing the residence in an exchange.”. (d) Conforming Amendments.— (1) The following provisions of the Internal Revenue Code of 1986 are each amended by striking “section 1034” and inserting “section 121”: sections 25(e)(7), 56(e)(1)(A), 56(e)(3)(B)(i), 111 STAT. 840143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I), 280A(d)(4)(A), 464(f)(3)(B)(i), 1033(h)(4), 1274(c)(3)(B), 6334(a)(13), and 7872(f)(11)(A). (2) Paragraph (4) of section 32(c) is amended by striking “(as defined in section 1034(h)(3))” and by adding at the end the following new sentence: “For purposes of the preceding sentence, the term ‘extended active duty’ means any period of active duty pursuant to a call or order to such duty for a period in excess of 90 days or for an indefinite period.”. (3) Subparagraph (A) of 143(m)(6) is amended by inserting “(as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997)” after “1034(e)”. (4) Subsection (e) of section 216 is amended by striking “such exchange qualifies for nonrecognition of gain under section 1034(f)” and inserting “such dwelling unit is used as his principal residence (within the meaning of section 121)”. (5) Section 512(a)(3)(D) is amended by inserting “(as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997)” after “1034”. (6) Paragraph (7) of section 1016(a) is amended by inserting “(as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997)” after “1034” and by inserting “(as so in effect)” after “1034(e)”. (7) Paragraph (3) of section 1033(k) is amended to read as follows: “(3) For exclusion from gross income of gain from involuntary conversion of principal residence, see section 121.”. (8) Subsection (e) of section 1038 is amended to read as follows: “(e) Principal Residences.—If— “(1) subsection (a) applies to a reacquisition of real property with respect to the sale of which gain was not recognized under section 121 (relating to gain on sale of principal residence); and “(2) within 1 year after the date of the reacquisition of such property by the seller, such property is resold by him, then, under regulations prescribed by the Secretary, subsections (b), (c), and (d) of this section shall not apply to the reacquisition of such property and, for purposes of applying section 121, the resale of such property shall be treated as a part of the transaction constituting the original sale of such property.”. (9) Paragraph (7) of section 1223 is amended by inserting “(as in effect on the day before the date of the enactment of the Taxpayer Relief Act of 1997)” after “1034”. (10)(A) Subsection (d) of section 1250 is amended by striking paragraph (7) and by redesignating paragraphs (9) and (10) as paragraphs (7) and (8), respectively. (B) Subsection (e) of section 1250 is amended by striking paragraph (3). (11) Subsection (c) of section 6012 is amended by striking “(relating to one-time exclusion of gain from sale of principal residence by individual who has attained age 55)” and inserting “(relating to gain from sale of principal residence)”. (12) Paragraph (2) of section 6212(c) is amended by striking subparagraph (C) and by redesignating the succeeding subparagraphs accordingly. (13) Section 6504 is amended by striking paragraph (4) and by redesignating the succeeding paragraphs accordingly.111 STAT. 841 (14) The item relating to section 121 in the table of sections for part III of subchapter B of chapter 1 is amended to read as follows: “Sec. 121. Exclusion of gain from sale of principal residence.”. (15) The table of sections for part III of subchapter O of chapter 1 is amended by striking the item relating to section 1034. (d) Effective Date.— (1) In general.—The amendments made by this section shall apply to sales and exchanges after May 6, 1997. (2) Sales before date of enactment.—At the election of the taxpayer, the amendments made by this section shall not apply to any sale or exchange before the date of the enactment of this Act. (3) Certain sales within 2 years after date of enactment.—Section 121 of the Internal Revenue Code of 1986 (as amended by this section) shall be applied without regard to subsection (c)(2)(B) thereof in the case of any sale or exchange of property during the 2-year period beginning on the date of the enactment of this Act if the taxpayer held such property on the date of the enactment of this Act and fails to meet the ownership and use requirements of subsection (a) thereof with respect to such property. (4) Binding contracts.—At the election of the taxpayer, the amendments made by this section shall not apply to a sale or exchange after the date of the enactment of this Act, if— (A) such sale or exchange is pursuant to a contract which was binding on such date, or (B) without regard to such amendments, gain would not be recognized under section 1034 of the Internal Revenue Code of 1986 (as in effect on the day before the date of the enactment of this Act) on such sale or exchange by reason of a new residence acquired on or before such date or with respect to the acquisition of which by the taxpayer a binding contract was in effect on such date. This paragraph shall not apply to any sale or exchange by an individual if the treatment provided by section 877(a)(1) of the Internal Revenue Code of 1986 applies to such individual.