II

104TH CONGRESS

1ST SESSION S. 973

To amend the Internal Revenue Code of 1986 to provide for the tax treatment

of residential ground rents, and for other purposes.

IN THE SENATE OF THE UNITED STATES

JUNE 27 (legislative day, JUNE 19), 1995

Mr. INOUYE introduced the following bill; which was read twice and referred

to the Committee on Finance

A BILL

To amend the Internal Revenue Code of 1986 to provide

for the tax treatment of residential ground rents, and

for other purposes.

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled,

3 SECTION 1. MORTGAGE INTEREST DEDUCTION FOR QUALI4 FIED NON-REDEEMABLE GROUND RENTS.

5 (a) IN GENERAL.—Section 163(c) of the Internal

6 Revenue Code of 1986 is amended to read as follows:

7 ‘‘(c) GROUND RENTS.—For purposes of this subtitle,

8 any annual or periodic rental under a redeemable ground

9 rent (excluding amounts in redemption thereof) or a quali-
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1 fied non-redeemable ground rent shall be treated as inter2 est on an indebtedness secured by a mortgage.’’

3 (b) TREATMENT OF QUALIFIED NON-REDEEMABLE

4 GROUND RENTS.—

5 (1) IN GENERAL.—Subsections (a), (b), and (d)

6 of section 1055 of the Internal Revenue Code of

7 1986 (relating to redeemable ground rents) are

8 amended by inserting ‘‘or qualified non-redeemable’’

9 after ‘‘redeemable’’ each place it appears.

10 (2) DEFINITION.—Section 1055 of such Code is

11 amended by redesignating subsection (d) as sub12 section (e) and by inserting after subsection (c) the

13 following new subsection:

14 ‘‘(d) QUALIFIED NON-REDEEMABLE GROUND

15 RENT.—For purposes of this subtitle, the term ‘qualified

16 non-redeemable ground rent’ means a ground rent with

17 respect to which—

18 ‘‘(1) there is a lease of land which is for a term

19 in excess of 15 years,

20 ‘‘(2) no portion of any payment is allocable to

21 the use of any property other than the land surface,

22 ‘‘(3) the lessor’s interest in the land is pri23 marily a security interest to protect the rental pay24 ments to which the lessor is entitled under the lease,

25 and
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1 ‘‘(4) the leased property must be used as the

2 taxpayer’s principal residence (within the meaning of

3 section 1034).’’

4 (3) CONFORMING AMENDMENTS.—

5 (A) The heading for section 1055 of such

6 Code is amended by striking ‘‘REDEEMABLE’’.

7 (B) The item relating to section 1055 in

8 the table of sections for part IV of subchapter

9 O of chapter 1 of subtitle A of such Code is

10 amended by striking ‘‘Redeemable ground’’ and

11 inserting ‘‘Ground’’.

12 (c) EFFECTIVE DATE.—The amendments made by

13 this section shall take effect on the date of the enactment

14 of this Act, with respect to taxable years ending after such

15 date.

16 SEC. 2. CREDIT FOR TRANSACTION COSTS ON THE TRANS17 FER OF LAND SUBJECT TO CERTAIN GROUND

18 RENTS.

19 (a) IN GENERAL.—Subpart B of part IV of sub20 chapter A of chapter 1 of the Internal Revenue Code of

21 1986 (relating to foreign tax credit, etc.) is amended by

22 inserting after section 30 the following new section:

23 ‘‘SEC. 30A. CREDIT FOR TRANSACTION COSTS.

24 ‘‘(a) ALLOWANCE OF CREDIT.—
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1 ‘‘(1) IN GENERAL.—At the election of the tax2 payer, there shall be allowed as a credit against the

3 tax imposed by this chapter for the taxable year an

4 amount equal to the transaction costs relating to

5 any sale or exchange of land subject to ground rents

6 with respect to which immediately after and for at

7 least 1 year prior to such sale or exchange—

8 ‘‘(A) the transferee is the lessee who owns

9 a dwelling unit on the land being transferred,

10 and

11 ‘‘(B) the transferor is the lessor.

12 ‘‘(2) CREDIT ALLOWED TO BOTH TRANSFEROR

13 AND TRANSFEREE.—The credit allowed under para14 graph (1) shall be allowed to both the transferor and

15 the transferee.

16 ‘‘(b) LIMITATIONS.—

17 ‘‘(1) LIMITATION PER DWELLING UNIT.—The

18 amount of the credit allowed to a taxpayer under

19 subsection (a) for any taxable year shall not exceed

20 the lesser of—

21 ‘‘(A) $5,000 per dwelling unit, or

22 ‘‘(B) 10 percent of the sale price of the

23 land.

24 ‘‘(2) LIMITATION BASED ON TAXABLE IN25 COME.—The amount of the credit allowed to a tax-
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1 payer under subsection (a) for any taxable year shall

2 not exceed the sum of—

3 ‘‘(A) 20 percent of the regular tax for the

4 taxable year reduced by the sum of the credits

5 allowable under subpart A and sections 27, 28,

6 29, and 30, plus

7 ‘‘(B) the alternative minimum tax imposed

8 by section 55.

9 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur10 poses of this section—

11 ‘‘(1) TRANSACTION COSTS.—

12 ‘‘(A) IN GENERAL.—The term ‘transaction

13 costs’ means any expenditure directly associated

14 with a transaction, the purpose of which is to

15 convey to the lessee, by the lessor, land subject

16 to ground rents.

17 ‘‘(B) SPECIFIC EXPENDITURES.—Such

18 term includes closing costs, attorney fees, sur19 veys and appraisals, and telephone, office, and

20 travel expenses incurred in negotiations with re21 spect to such transaction.

22 ‘‘(C) LOST RENTS NOT INCLUDED.—Such

23 term does not include lost rents due to the pre24 mature termination of an existing lease.
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1 ‘‘(2) DWELLING UNIT.—A dwelling unit shall

2 include any structure or portion of any structure

3 which serves as the principal residence (within the

4 meaning of section 1034) for the lessee.

5 ‘‘(3) REDUCTION IN BASIS.—The basis of prop6 erty acquired in a transaction to which this section

7 applies shall be reduced by the amount of credit al8 lowed under subsection (a).

9 ‘‘(4) ELECTION.—This section shall apply to

10 any taxpayer for the taxable year only if such tax11 payer elects to have this section so apply.

12 ‘‘(d) CARRYOVER OF CREDIT.—

13 ‘‘(1) CARRYOVER PERIOD.—If the credit al14 lowed to the taxpayer under subsection (a) for any

15 taxable year exceeds the amount of the limitation

16 imposed by subsection (b)(2) for such taxable year

17 (hereafter in this subsection referred to as the ‘un18 used credit year’), such excess shall be a carryover

19 to each of the 5 succeeding taxable years.

20 ‘‘(2) AMOUNT CARRIED TO EACH YEAR.—

21 ‘‘(A) ENTIRE AMOUNT CARRIED TO FIRST

22 YEAR.—The entire amount of the unused credit

23 for an unused credit year shall be carried to the

24 earliest of the 5 taxable years to which (by rea-
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1 son of paragraph (1)) such credit may be car2 ried.

3 ‘‘(B) AMOUNT CARRIED TO OTHER 4

4 YEARS.—The amount of unused credit for the

5 unused credit year shall be carried to each of

6 the remaining 4 taxable years to the extent that

7 such unused credit may not be taken into ac8 count for a prior taxable year because of the

9 limitation imposed by subsection (b)(2).

10 ‘‘(e) TERMINATION.—This section shall not apply to

11 any transaction cost paid or incurred in taxable years be12 ginning after December 31, 1999.’’

13 (b) CLERICAL AMENDMENT.—The table of sections

14 for such subpart B is amended by inserting after the item

15 relating to section 30 the following new item:

‘‘Sec. 30A. Credit for transaction costs on the transfer of land

subject to certain ground rents.’’

16 (c) EFFECTIVE DATE.—The amendments made by

17 this section shall apply to expenditures paid or incurred

18 in taxable years beginning after December 31, 1994.

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