To amend the Internal Revenue Code of 1986 to exclude from income capital gain from the sale of a principal residence.

Summary: Amends the Internal Revenue Code to exclude all gain on the sale of a principal residence if owned and used as the principal residence for periods aggregating at least three years during the five-year period prior to sale or exchange. 
Sets forth special rules relating to:  (1) jointly held property; (2) a deceased spouse; (3) a cooperative housing tenant-stockholder; (4) partial principal residence use; (5) determination of marital status; (6) acquisition after involuntary conversion; and (7) periods of out-of-residence health care.

SECTION 1. EXCLUSION FROM INCOME OF GAIN FROM SALE OF PRINCIPAL 
              RESIDENCE.

    (a) In General.--Section 121 of the Internal Revenue Code of 1986 
is amended to read as follows:

``SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.

    ``(a) General Rule.--Gross income does 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 his principal residence for periods aggregating 3 years 
or more.
    ``(b) Special Rules.--
            ``(1) Property held jointly by husband and wife.--For 
        purposes of this section, if--
                    ``(A) property is held by a husband and wife as 
                joint tenants, tenants by the entirety, or community 
                property,
                    ``(B) such husband and wife make a joint return 
                under section 6013 for the taxable year of the sale or 
                exchange, and
                    ``(C) one spouse satisfies the holding and use 
                requirements of subsection (a) with respect to such 
                property,
        then both husband and wife shall be treated as satisfying the 
        holding 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, if 
        the deceased spouse (during the 5-year period ending on the 
        date of the sale or exchange) satisfied the holding and use 
        requirements of subsection (a) with respect to such property, 
        then such individual shall be treated as satisfying the holding 
        and use requirements of subsection (a) with respect to such 
        property.
            ``(3) 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.
            ``(4) Involuntary conversions.--For purposes of this 
        section, the destruction, theft, seizure, requisition, or 
        condemnation of property shall be treated as the sale of such 
        property.
            ``(5) Property used in part as principal residence.--In the 
        case of property only a portion of which, during the 5-year 
        period ending on the date of the sale or exchange, has been 
        owned and used by the taxpayer as his principal residence for 
        periods aggregating 3 years or more, this section shall apply 
        with respect to so much of the gain from the sale or exchange 
        of such property as is determined, under regulations prescribed 
        by the Secretary, to be attributable to the portion of the 
        property so owned and used by the taxpayer.
            ``(6) Determination of marital status.--In the case of any 
        sale or exchange, for purposes of this section--
                    ``(A) the determination of whether an individual is 
                married shall be made as of the date of the sale or 
                exchange; and
                    ``(B) an individual legally separated from his 
                spouse under a decree of divorce or of separate 
                maintenance shall not be considered as married.
            ``(7) 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 
        an election under this section.
            ``(8) Property acquired after involuntary conversion.--If 
        the basis of the property sold or exchanged is determined (in 
        whole or in part) under subsection (b) of section 1033 
        (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.
            ``(9) Determination of use during periods of out-of-
        residence care.--In the case of a taxpayer who--
                    ``(A) becomes physically or mentally incapable of 
                self-care, 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.
    ``(c) Election to Have Section Not Apply.--If the taxpayer so 
elects with respect to any sale or exchange, this section shall not 
apply to such sale or exchange.''
    (b) Repeal of Nonrecognition of Gain on Rollover of Principal 
Residence.--Section 1034 of such Code (relating to rollover of gain on 
sale of principal residence) is hereby repealed.
    (c) Clerical and 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), 143(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) of such Code 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) of such Code is amended 
        by inserting ``(as in effect on the day before the date of the 
        enactment of the Revenue Reconciliation Act of 1997)'' after 
        ``1034(e)''.
            (4) Subsection (e) of section 216 of such Code 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) of such Code is amended by 
        inserting ``(as in effect on the day before the date of the 
        enactment of this parenthetical)'' after ``1034''.
            (6) Paragraph (7) of section 1016(a) of such Code is 
        amended by inserting ``(as in effect on the day before the date 
        of the enactment of this parenthetical)'' after ``1034'' and by 
        inserting ``(as so in effect)'' after ``1034(e)''.
            (7) Paragraph (3) of section 1033(k) of such Code 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 of such Code 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 of such Code is amended 
        by inserting ``(as in effect on the day before the date of the 
        enactment of this parenthetical)'' after ``1034''.
            (10) Paragraph (7) of section 1250(d) of such Code is 
        amended to read as follows:
            ``(7) Disposition of principal residence.--Subsection (a) 
        shall not apply to a disposition of property to the extent used 
        by the taxpayer as his principal residence (within the meaning 
        of section 121, relating to gain on sale of principal 
        residence).''
            (11) Subsection (c) of section 6012 of such Code 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) of such Code is 
        amended by striking subparagraph (C) and by redesignating the 
        succeeding subparagraphs accordingly.
            (13) Section 6504 of such Code is amended by striking 
        paragraph (4) and by redesignating the succeeding paragraphs 
        accordingly.
            (14) The item relating to section 121 in the table of 
        sections for part III of subchapter B of chapter 1 of such Code 
        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 of such Code is amended by striking the item relating 
        to section 1034.
    (d) Effective Date.--The amendments made by this section shall 
apply to sales and exchanges occurring after __________________.