II

105TH CONGRESS

1ST SESSION S. 117

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

JANUARY 21, 1997

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
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1 rent (excluding amounts in redemption thereof) or a quali2 fied non-redeemable ground rent shall be treated as inter3 est on an indebtedness secured by a mortgage.’’

4 (b) TREATMENT OF QUALIFIED NON-REDEEMABLE

5 GROUND RENTS.—

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

7 of section 1055 of the Internal Revenue Code of

8 1986 (relating to redeemable ground rents) are

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

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

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

12 amended by redesignating subsection (d) as sub13 section (e) and by inserting after subsection (c) the

14 following new subsection:

15 ‘‘(d) QUALIFIED NON-REDEEMABLE GROUND

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

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

18 respect to which—

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

20 in excess of 15 years,

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

22 the use of any property other than the land surface,
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1 ‘‘(3) the lessor’s interest in the land is pri2 marily a security interest to protect the rental pay3 ments to which the lessor is entitled under the lease,

4 and

5 ‘‘(4) the leased property must be used as the

6 taxpayer’s principal residence (within the meaning of

7 section 1034).’’

8 (3) CONFORMING AMENDMENTS.—

9 (A) The heading for section 1055 of such

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

11 (B) The item relating to section 1055 in

12 the table of sections for part IV of subchapter

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

14 amended by striking ‘‘Redeemable ground’’ and

15 inserting ‘‘Ground’’.

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

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

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

19 date.

20 SEC. 2. CREDIT FOR TRANSACTION COSTS ON THE TRANS21 FER OF LAND SUBJECT TO CERTAIN GROUND

22 RENTS.

23 (a) IN GENERAL.—Subpart B of part IV of sub24 chapter A of chapter 1 of the Internal Revenue Code of
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1 1986 (relating to foreign tax credit, etc.) is amended by

2 inserting after section 30A the following new section:

3 ‘‘SEC. 30B. CREDIT FOR TRANSACTION COSTS.

4 ‘‘(a) ALLOWANCE OF CREDIT.—

5 ‘‘(1) IN GENERAL.—At the election of the tax6 payer, there shall be allowed as a credit against the

7 tax imposed by this chapter for the taxable year an

8 amount equal to the transaction costs relating to

9 any sale or exchange of land subject to ground rents

10 with respect to which immediately after and for at

11 least 1 year prior to such sale or exchange—

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

13 a dwelling unit on the land being transferred,

14 and

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

16 ‘‘(2) CREDIT ALLOWED TO BOTH TRANSFEROR

17 AND TRANSFEREE.—The credit allowed under para18 graph (1) shall be allowed to both the transferor and

19 the transferee.

20 ‘‘(b) LIMITATIONS.—

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

22 amount of the credit allowed to a taxpayer under

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

24 the lesser of—

25 ‘‘(A) $5,000 per dwelling unit, or
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1 ‘‘(B) 10 percent of the sale price of the

2 land.

3 ‘‘(2) LIMITATION BASED ON TAXABLE IN4 COME.—The amount of the credit allowed to a tax5 payer under subsection (a) for any taxable year shall

6 not exceed the sum of—

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

8 taxable year reduced by the sum of the credits

9 allowable under subpart A and sections 27, 28,

10 29, 30, and 30A plus

11 ‘‘(B) the alternative minimum tax imposed

12 by section 55.

13 ‘‘(c) DEFINITIONS AND SPECIAL RULES.—For pur14 poses of this section—

15 ‘‘(1) TRANSACTION COSTS.—

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

17 costs’ means any expenditure directly associated

18 with a transaction, the purpose of which is to

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

20 to ground rents.

21 ‘‘(B) SPECIFIC EXPENDITURES.—Such

22 term includes closing costs, attorney fees, sur23 veys and appraisals, and telephone, office, and

24 travel expenses incurred in negotiations with re25 spect to such transaction.
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1 ‘‘(C) LOST RENTS NOT INCLUDED.—Such

2 term does not include lost rents due to the pre3 mature termination of an existing lease.

4 ‘‘(2) DWELLING UNIT.—A dwelling unit shall

5 include any structure or portion of any structure

6 which serves as the principal residence (within the

7 meaning of section 1034) for the lessee.

8 ‘‘(3) REDUCTION IN BASIS.—The basis of prop9 erty acquired in a transaction to which this section

10 applies shall be reduced by the amount of credit al11 lowed under subsection (a).

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

13 any taxpayer for the taxable year only if such tax14 payer elects to have this section so apply.

15 ‘‘(d) CARRYOVER OF CREDIT.—

16 ‘‘(1) CARRYOVER PERIOD.—If the credit al17 lowed to the taxpayer under subsection (a) for any

18 taxable year exceeds the amount of the limitation

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

20 (hereafter in this subsection referred to as the ‘un21 used credit year’), such excess shall be a carryover

22 to each of the 5 succeeding taxable years.

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

24 ‘‘(A) ENTIRE AMOUNT CARRIED TO FIRST

25 YEAR.—The entire amount of the unused credit
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1 for an unused credit year shall be carried to the

2 earliest of the 5 taxable years to which (by rea3 son of paragraph (1)) such credit may be car4 ried.

5 ‘‘(B) AMOUNT CARRIED TO OTHER 4

6 YEARS.—The amount of unused credit for the

7 unused credit year shall be carried to each of

8 the remaining 4 taxable years to the extent that

9 such unused credit may not be taken into ac10 count for a prior taxable year because of the

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

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

13 any transaction cost paid or incurred in taxable years be14 ginning after December 31, 2001.’’

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

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

17 relating to section 30A the following new item:

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

subject to certain ground rents.’’

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

19 this section shall apply to expenditures paid or incurred

20 in taxable years beginning after December 31, 1996.

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