I

104TH CONGRESS

2D SESSION H. R. 4231

To amend the Internal Revenue Code of 1986 to provide an exemption

from tax for gain on sale of a principal residence.

IN THE HOUSE OF REPRESENTATIVES

SEPTEMBER 27, 1996

Mr. ORTON (for himself and Mr. GIBBONS) introduced the following bill; which

was referred to the Committee on Ways and Means

A BILL

To amend the Internal Revenue Code of 1986 to provide

an exemption from tax for gain on sale of a principal

residence.

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

3 SECTION 1. SHORT TITLE.

4 This Act may be cited as the ‘‘Principal Residence

5 Tax Exclusion Act of 1996’’.

6 SEC. 2. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRIN7 CIPAL RESIDENCE.

8 (a) IN GENERAL.—Section 121 of the Internal Reve9 nue Code of 1986 (relating to one-time exclusion of gain
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1 from sale of principal residence by individual who has at2 tained age 55) is amended to read as follows:

3 ‘‘SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL

4 RESIDENCE.

5 ‘‘(a) EXCLUSION.—Gross income shall not include

6 gain from the sale or exchange of property if, during the

7 5-year period ending on the date of the sale or exchange,

8 such property has been owned and used by the taxpayer

9 as the taxpayer’s principal residence for periods aggregat10 ing 2 years or more.

11 ‘‘(b) LIMITATIONS.—

12 ‘‘(1) DOLLAR LIMITATION.—The amount of

13 gain excluded from gross income under subsection

14 (a) with respect to any sale or exchange shall not ex15 ceed $250,000 ($500,000 in the case of a joint re16 turn where both spouses meet the use requirement

17 of subsection (a)).

18 ‘‘(2) APPLICATION TO ONLY 1 SALE OR EX19 CHANGE EVERY 2 YEARS.—

20 ‘‘(A) IN GENERAL.—Subsection (a) shall

21 not apply to any sale or exchange by the tax22 payer if, during the 2-year period ending on the

23 date of such sale or exchange, there was any

24 other sale or exchange by the taxpayer or his

25 spouse to which subsection (a) applied.
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1 ‘‘(B) PREMARRIAGE SALES BY SPOUSE

2 NOT TAKEN INTO ACCOUNT.—If, but for this

3 subparagraph, subsection (a) would not apply

4 to a sale or exchange by a married individual

5 by reason of a sale or exchange by such individ6 ual’s spouse before their marriage—

7 ‘‘(i) subparagraph (A) shall be applied

8 without regard to the sale or exchange by

9 such individual’s spouse, but

10 ‘‘(ii) the amount of gain excluded

11 from gross income under subsection (a)

12 with respect to the sale or exchange by

13 such individual shall not exceed $250,000.

14 ‘‘(C) PRE-1997 SALES NOT TAKEN INTO AC15 COUNT.—Subparagraph (A) shall be applied

16 without regard to any sale or exchange before

17 January 1, 1997.

18 ‘‘(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET

19 CERTAIN REQUIREMENTS.—

20 ‘‘(1) IN GENERAL.—In the case of a sale or ex21 change to which this subsection applies, the owner22 ship and use requirements of subsection (a) shall not

23 apply and subsection (b)(2) shall not apply; but the

24 amount of gain excluded from gross income under
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1 subsection (a) with respect to such sale of exchange

2 shall not exceed—

3 ‘‘(A) the amount which bears the same

4 ratio to the amount which would be so excluded

5 if such requirements had been met, as

6 ‘‘(B) the shorter of—

7 ‘‘(i) the aggregate periods, during the

8 5-year period ending on the date of such

9 sale or exchange, such property has been

10 owned and used by the taxpayer as the

11 taxpayer’s principal residence, or

12 ‘‘(ii) the period after the date of the

13 most recent prior sale or exchange by the

14 taxpayer or his spouse to which subsection

15 (a) applied and before the date of such sale

16 or exchange,

17 bears to 2 years.

18 ‘‘(2) SALES AND EXCHANGES TO WHICH SUB19 SECTION APPLIES.—This subsection shall apply to

20 any sale or exchange if—

21 ‘‘(A) subsection (a) would not (but for this

22 subsection) apply to such sale or exchange by

23 reason of—

24 ‘‘(i) a failure to meet the ownership

25 and use requirements of subsection (a), or
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1 ‘‘(ii) subsection (b)(2), and

2 ‘‘(B) such sale or exchange is by reason of

3 a change in place of employment, health, or

4 other unforeseen circumstances.

5 ‘‘(d) SPECIAL RULES.—

6 ‘‘(1) JOINT RETURNS.—For purposes of this

7 section, if a husband and wife make a joint return

8 for the taxable year of the sale or exchange of prop9 erty, subsection (a) applies if either spouse meets

10 the ownership and use requirements of subsection

11 (a) with respect to such property.

12 ‘‘(2) PROPERTY OF DECEASED SPOUSE.—For

13 purposes of this section, in the case of an unmarried

14 individual whose spouse is deceased on the date of

15 the sale or exchange of property, the period such un16 married individual owned such property shall include

17 the period such deceased spouse held such property

18 before death.

19 ‘‘(3) TENANT-STOCKHOLDER IN COOPERATIVE

20 HOUSING CORPORATION.—For purposes of this sec21 tion, if the taxpayer holds stock as a tenant-stock22 holder (as defined in section 216) in a cooperative

23 housing corporation (as defined in such section),

24 then—
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1 ‘‘(A) the holding requirements of sub2 section (a) shall be applied to the holding of

3 such stock, and

4 ‘‘(B) the use requirements of subsection

5 (a) shall be applied to the house or apartment

6 which the taxpayer was entitled to occupy as

7 such stockholder.

8 ‘‘(4) INVOLUNTARY CONVERSIONS.—

9 ‘‘(A) IN GENERAL.—For purposes of this

10 section, the destruction, theft, seizure, requisi11 tion, or condemnation of property shall be

12 treated as the sale of such property.

13 ‘‘(B) APPLICATION OF SECTION 1033.—In

14 applying section 1033 (relating to involuntary

15 conversions), the amount realized from the sale

16 or exchange of property shall be treated as

17 being the amount determined without regard to

18 this section, reduced by the amount of gain not

19 included in gross income pursuant to this sec20 tion.

21 ‘‘(C) PROPERTY ACQUIRED AFTER INVOL22 UNTARY CONVERSION.—If the basis of the

23 property sold or exchanged is determined (in

24 whole or in part) under section 1033(b) (relat25 ing to basis of property acquired through invol-
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1 untary conversion), then the holding and use by

2 the taxpayer of the converted property shall be

3 treated as holding and use by the taxpayer of

4 the property sold or exchanged.

5 ‘‘(5) RECOGNITION OF GAIN ATTRIBUTABLE TO

6 DEPRECIATION.—Subsection (a) shall not apply to

7 so much of the gain from the sale of any property

8 as does not exceed the portion of the depreciation

9 adjustments (as defined in section 1250(b)(3)) at10 tributable to periods after December 31, 1996, in re11 spect of such property.

12 ‘‘(6) DETERMINATION OF USE DURING PERIODS

13 OF OUT-OF-RESIDENCE CARE.—In the case of a tax14 payer who—

15 ‘‘(A) becomes physically or mentally in16 capable of self-care, and

17 ‘‘(B) owns property and uses such property

18 as the taxpayer’s principal residence during the

19 5-year period described in subsection (a) for pe20 riods aggregating at least 1 year,

21 then the taxpayer shall be treated as using such

22 property as the taxpayer’s principal residence during

23 any time during such 5-year period in which the tax24 payer owns the property and resides in any facility

25 (including a nursing home) licensed by a State or
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1 political subdivision to care for an individual in the

2 taxpayer’s condition.

3 ‘‘(7) DETERMINATION OF MARITAL STATUS.—

4 In the case of any sale or exchange, for purposes of

5 this section—

6 ‘‘(A) the determination of whether an indi7 vidual is married shall be made as of the date

8 of the sale or exchange, and

9 ‘‘(B) an individual legally separated from

10 his spouse under a decree of divorce or of sepa11 rate maintenance shall not be considered as

12 married.

13 ‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—

14 This section shall not apply to any sale or exchange by

15 an individual if the treatment provided by section

16 877(a)(1) applies to such individual.

17 ‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.—

18 This section shall not apply to any sale or exchange with

19 respect to which the taxpayer elects not to have this sec20 tion apply.

21 ‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER

22 SECTION 1034.—For purposes of this section, in the case

23 of property the acquisition of which by the taxpayer re24 sulted under section 1034 (as in effect on the day before

25 the date of the enactment of this sentence) in the non-
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1 recognition of any part of the gain realized on the sale

2 or exchange of another residence, in determining the pe3 riod for which the taxpayer has owned and used such

4 property as the taxpayer’s principal residence, there shall

5 be included the aggregate periods for which such other

6 residence (and each prior residence taken into account

7 under section 1223(7) in determining the holding period

8 of such property) had been so owned and used.’’

9 (b) REPEAL OF NONRECOGNITION OF GAIN ON

10 ROLLOVER OF PRINCIPAL RESIDENCE.—Section 1034 of

11 such Code (relating to rollover of gain on sale of principal

12 residence) is hereby repealed.

13 (c) CONFORMING AMENDMENTS.—

14 (1) The following provisions of the Internal

15 Revenue Code of 1986 are each amended by striking

16 ‘‘section 1034’’ and inserting ‘‘section 121’’: sections

17 25(e)(7), 56(e)(1)(A), 56(e)(3)(B)(i),

18 143(i)(1)(C)(i)(I), 163(h)(4)(A)(i)(I),

19 280A(d)(4)(A), 464(f)(3)(B)(i), 1033(h)(3),

20 1274(c)(3)(B), 6334(a)(13), and 7872(f)(11)(A).

21 (2) Paragraph (4) of section 32(c) of such Code

22 is amended by striking ‘‘(as defined in section

23 1034(h)(3))’’ and by adding at the end the following

24 new sentence: ‘‘For purposes of the preceding sen25 tence, the term ‘extended active duty’ means any pe-
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1 riod of active duty pursuant to a call or order to

2 such duty for a period in excess of 90 days or for

3 an indefinite period.’’

4 (3) Subparagraph (A) of 143(m)(6) of such

5 Code is amended by inserting ‘‘(as in effect on the

6 day before the date of the enactment of the Prin7 cipal Residence Tax Exclusion Act of 1996)’’ after

8 ‘‘1034(e)’’.

9 (4) Subsection (e) of section 216 of such Code

10 is amended by striking ‘‘such exchange qualifies for

11 nonrecognition of gain under section 1034(f)’’ and

12 inserting ‘‘such dwelling unit is used as his principal

13 residence (within the meaning of section 121)’’.

14 (5) Section 512(a)(3)(D) of such Code is

15 amended by inserting ‘‘(as in effect on the day be16 fore the date of the enactment of the Principal Resi17 dence Tax Exclusion Act of 1996)’’ after ‘‘1034’’.

18 (6) Paragraph (7) of section 1016(a) of such

19 Code is amended by inserting ‘‘(as in effect on the

20 day before the date of the enactment of the Prin21 cipal Residence Tax Exclusion Act of 1996)’’ after

22 ‘‘1034’’ and by inserting ‘‘(as so in effect)’’ after

23 ‘‘1034(e)’’.

24 (7) Paragraph (3) of section 1033(k) of such

25 Code is amended to read as follows:
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1 ‘‘(3) For exclusion from gross income of gain

2 from involuntary conversion of principal residence,

3 see section 121.’’

4 (8) Subsection (e) of section 1038 of such Code

5 is amended to read as follows:

6 ‘‘(e) PRINCIPAL RESIDENCES.—If—

7 ‘‘(1) subsection (a) applies to a reacquisition of

8 real property with respect to the sale of which gain

9 was not recognized under section 121 (relating to

10 gain on sale of principal residence); and

11 ‘‘(2) within 1 year after the date of the reacqui12 sition of such property by the seller, such property

13 is resold by him,

14 then, under regulations prescribed by the Secretary, sub15 sections (b), (c), and (d) of this section shall not apply

16 to the reacquisition of such property and, for purposes of

17 applying section 121, the resale of such property shall be

18 treated as a part of the transaction constituting the origi19 nal sale of such property.’’

20 (9) Paragraph (7) of section 1223 of such Code

21 is amended by inserting ‘‘(as in effect on the day be22 fore the date of the enactment of the Principal Resi23 dence Tax Exclusion Act of 1996)’’ after ‘‘1034’’.

24 (10) Paragraph (7) of section 1250(d) of such

25 Code is amended to read as follows:
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1 ‘‘(7) DISPOSITION OF PRINCIPAL RESIDENCE.—

2 Subsection (a) shall not apply to a disposition of

3 property to the extent used by the taxpayer as his

4 principal residence (within the meaning of section

5 121, relating to gain on sale of principal residence).’’

6 (11) Subsection (c) of section 6012 of such

7 Code is amended by striking ‘‘(relating to one-time

8 exclusion of gain from sale of principal residence by

9 individual who has attained age 55)’’ and inserting

10 ‘‘(relating to gain from sale of principal residence)’’.

11 (12) Paragraph (2) of section 6212(c) of such

12 Code is amended by striking subparagraph (C) and

13 by redesignating the succeeding subparagraphs ac14 cordingly.

15 (13) Section 6504 of such Code is amended by

16 striking paragraph (4) and by redesignating the suc17 ceeding paragraphs accordingly.

18 (14) The item relating to section 121 in the

19 table of sections for part III of subchapter B of

20 chapter 1 of such Code is amended to read as fol21 lows:

‘‘Sec. 121. Exclusion of gain from sale of principal residence.’’

22 (15) The table of sections for part III of sub23 chapter O of chapter 1 of such Code is amended by

24 striking the item relating to section 1034.

25 (d) EFFECTIVE DATE.—
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1 (1) IN GENERAL.—The amendments made by

2 this section shall apply to sales and exchanges after

3 December 31, 1996.

4 (2) BINDING CONTRACTS, ETC.—At the election

5 of the taxpayer, the amendments made by this sec6 tion shall not apply to a sale or exchange after De7 cember 31, 1996, if—

8 (A) such sale or exchange is pursuant to a

9 contract which was binding on September 25,

10 1996, and at all times before such sale or ex11 change, or

12 (B) without regard to such amendments,

13 gain would not be recognized under section

14 1034 of the Internal Revenue Code of 1986 (as

15 in effect on the day before the date of the en16 actment of this Act) on such sale or exchange

17 by reason of a new residence acquired on or be18 fore such date.

19 This paragraph shall not apply to any sale or ex20 change by an individual if the treatment provided by

21 section 877(a)(1) of the Internal Revenue Code of

22 1986 applies to such individual.

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