To amend the Internal Revenue Code of 1986 to exclude from gross income up to $500,000 of gain on the sale of a principle residence and up to $500,000 of gain on the sale of farmland.

Summary: Amends the Internal Revenue Code to revise rules concerning the exclusion from gain on the sale of a principal residence and on the sale of farmland, including providing for an exclusion of up to $500,000 in gains.

SECTION 1. EXCLUSION OF GAIN ON SALE OF PRINCIPAL RESIDENCE.

    (a) In General.--Section 121 of the Internal Revenue Code of 1986 
(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) 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) Dollar Limitation.--The amount of the gain excluded from 
gross income under subsection (a) shall not exceed $500,000 ($250,000 
in the case of a separate return by a married individual).
    ``(c) 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 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.--
                    ``(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) 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.
            ``(5) Application of sections 1033 and 1034.--In applying 
        sections 1033 (relating to involuntary conversions) and 1034 
        (relating to sale or exchange of residence), 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 
        under this section.
            ``(6) 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.
            ``(7) 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.
            ``(8) 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.''
    (b) Technical Amendments.--
            (1) Sections 1033(k)(3), 1034(l), 1038(e)(1)(A), 
        1250(d)(7)(B), and 6012(c) of such Code are each amended by 
        striking ``who has attained age 55''.
            (2) The table of sections for part III of subchapter B of 
        chapter 1 of such Code is amended by striking the item relating 
        to section 121 and inserting the following:

                              ``Sec. 121. Exclusion of gain from sale 
                                        of principal residence.''
    (c) Effective Date.--The amendments made by this section shall 
apply to sales and exchanges after December 31, 1996.

SEC. 2. EXCLUSION OF GAIN ON SALE OF FARMLAND.

    (a) In General.--Part III of subchapter B of chapter 1 of the 
Internal Revenue Code of 1986 (relating to items specifically excluded 
from gross income) is amended by inserting after section 121 the 
following new section:

``SEC. 121A. EXCLUSION OF GAIN FROM SALE OF FARMLAND.

    ``(a) General Rule.--Gross income does not include gain from the 
sale or exchange of property if--
            ``(1) such property is owned by the taxpayer throughout the 
        3-year period ending on the date of the sale or exchange, and
            ``(2) during the 5-year period ending on such date, such 
        property has been used by any person as a farm for farming 
        purposes (as defined in section 2032A(e)) for periods 
        aggregating 3 years or more.
    ``(b) Dollar Limitation.--The amount of the gain excluded from 
gross income under subsection (a) shall not exceed $500,000 ($250,000 
in the case of a separate return by a married individual).
    ``(c) Special Rules.--Rules similar to the rules of paragraphs (1), 
(2), and (7) of section 121(d) shall apply for purposes of this 
section.''
    (b) Clerical Amendment.--The table of sections for such part III is 
amended by inserting after the item relating to section 121 the 
following new item:

                              ``Sec. 121A. Exclusion of gain from sale 
                                        of farmland.''
    (c) Effective Date.--The amendments made by this section shall 
apply to sales and exchanges after December 31, 1996.