To amend the Internal Revenue Code of 1986 to provide for an exclusion of capital gains upon the sale of a principal residence.

SECTION 1. EXCLUSION OF GAIN ON 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 ON 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 2 years 
or more.
    ``(b) Dollar Limitation.--
            ``(1) In general.--The amount of the gain excluded from 
        gross income under subsection (a) shall not exceed $250,000 
        ($500,000 in the case of a joint return where both spouses meet 
        the holding and use requirements of subsection (a)).
            ``(2) Inflation adjustment.--
                    ``(A) In general.--In the case of a taxable year 
                beginning in a calendar year after 1997, the $250,000 
                and $500,000 amounts contained in paragraph (1) shall 
                each be increased by an amount equal to--
                            ``(i) such dollar amount, multiplied by
                            ``(ii) the cost-of-living adjustment under 
                        section 1(f)(3) for the calendar year in which 
                        the taxable year begins, determined by 
                        substituting `calendar year 1996' for `calendar 
                        year 1992' in subparagraph (B) thereof.
                    ``(B) Rounding.--If any amount as adjusted under 
                subparagraph (A) is not a multiple of $100, such amount 
                shall be rounded to the nearest multiple of $100.
    ``(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 
                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 
2 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 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.
            ``(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.
    ``(d) Election To Have Section Not Apply.--At the election of the 
taxpayer with respect to any sale or exchange of a principal residence, 
this section shall not apply to such sale or exchange.''
    (b) Conforming Amendments.--
            (1) 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.''
            (2) Subparagraph (A) of section 1038(e)(1) 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 the following: ``(relating to gain on sale of 
        principal residence)''.
            (3) subparagraph (B) of section 1250(d)(7) is amended to 
        read as follows:
                    ``(B) property in respect of which the taxpayer 
                meets the ownership requirements of section 121, but 
                only to the extent that the taxpayer meets the use 
                requirements of such section in respect of such 
                property.''
            (4) 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)''.
            (5) 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.''
    (c) Effective Date.--The amendments made by this section shall 
apply to sales and exchanges on or after the date of the enactment of 
this Act.

Summary: Amends the Internal Revenue Code to exclude up to $250,000 of gain on the sale of a principal residence if owned and used as the principal residence for periods aggregating at least two 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 (6) periods of out-of-residence health care.