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.
Be it enacted by the Senate and House of Representa-
tives of the United States of America in Congress assembled,
SECTION 1. SHORT TITLE.
This Act may be cited as the ‘‘Principal Residence
Tax Exclusion Act of 1996’’.
SEC. 2. EXEMPTION FROM TAX FOR GAIN ON SALE OF PRIN-
CIPAL RESIDENCE.
(a) IN GENERAL.—Section 121 of the Internal Reve-
nue Code of 1986 (relating to one-time exclusion of gain
from sale of principal residence by individual who has at-
tained age 55) is amended to read as follows:
‘‘SEC. 121. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL
RESIDENCE.
‘‘(a) EXCLUSION.—Gross income shall 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 the taxpayer’s principal residence for periods aggregat-
ing 2 years or more.
‘‘(b) LIMITATIONS.—
‘‘(1) DOLLAR
LIMITATION.—The amount of
gain excluded from gross income under subsection
(a) with respect to any sale or exchange shall not ex-
ceed $250,000 ($500,000 in the case of a joint re-
turn where both spouses meet the use requirement
of subsection (a)).
‘‘(2) APPLICATION
TO
ONLY
SALE
OR
EX-
CHANGE EVERY 2 YEARS.—
‘‘(A) IN
GENERAL.—Subsection (a) shall
not apply to any sale or exchange by the tax-
payer if, during the 2-year period ending on the
date of such sale or exchange, there was any
other sale or exchange by the taxpayer or his
spouse to which subsection (a) applied.
‘‘(B) PREMARRIAGE
SALES
BY
SPOUSE
NOT TAKEN INTO ACCOUNT.—If, but for this
subparagraph, subsection (a) would not apply
to a sale or exchange by a married individual
by reason of a sale or exchange by such individ-
ual’s spouse before their marriage—
‘‘(i) subparagraph (A) shall be applied
without regard to the sale or exchange by
such individual’s spouse, but
‘‘(ii) the amount of gain excluded
from gross income under subsection (a)
with respect to the sale or exchange by
such individual shall not exceed $250,000.
‘‘(C) PRE-1997 SALES NOT TAKEN INTO AC-
COUNT.—Subparagraph (A) shall be applied
without regard to any sale or exchange before
January 1, 1997.
‘‘(c) EXCLUSION FOR TAXPAYERS FAILING TO MEET
CERTAIN REQUIREMENTS.—
‘‘(1) IN GENERAL.—In the case of a sale or ex-
change to which this subsection applies, the owner-
ship and use requirements of subsection (a) shall not
apply and subsection (b)(2) shall not apply; but the
amount of gain excluded from gross income under
subsection (a) with respect to such sale of exchange
shall not exceed—
‘‘(A) the amount which bears the same
ratio to the amount which would be so excluded
if such requirements had been met, as
‘‘(B) the shorter of—
‘‘(i) the aggregate periods, during the
5-year period ending on the date of such
sale or exchange, such property has been
owned and used by the taxpayer as the
taxpayer’s principal residence, or
‘‘(ii) the period after the date of the
most recent prior sale or exchange by the
taxpayer or his spouse to which subsection
(a) applied and before the date of such sale
or exchange,
bears to 2 years.
‘‘(2) SALES AND EXCHANGES TO WHICH SUB-
SECTION APPLIES.—This subsection shall apply to
any sale or exchange if—
‘‘(A) subsection (a) would not (but for this
subsection) apply to such sale or exchange by
reason of—
‘‘(i) a failure to meet the ownership
and use requirements of subsection (a), or
‘‘(ii) subsection (b)(2), and
‘‘(B) such sale or exchange is by reason of
a change in place of employment, health, or
other unforeseen circumstances.
‘‘(d) SPECIAL RULES.—
‘‘(1) JOINT
RETURNS.—For purposes of this
section, if a husband and wife make a joint return
for the taxable year of the sale or exchange of prop-
erty, subsection (a) applies if either spouse meets
the ownership 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, the period such un-
married individual owned such property shall include
the period such deceased spouse held such property
before death.
‘‘(3) TENANT-STOCKHOLDER IN COOPERATIVE
HOUSING CORPORATION.—For purposes of this sec-
tion, if the taxpayer holds stock as a tenant-stock-
holder (as defined in section 216) in a cooperative
housing corporation (as defined in such section),
then—
‘‘(A) the holding requirements of sub-
section (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, requisi-
tion, or condemnation of property shall be
treated as the sale of such property.
‘‘(B) APPLICATION OF SECTION 1033.—In
applying section 1033 (relating to involuntary
conversions), 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 pursuant to this sec-
tion.
‘‘(C) PROPERTY ACQUIRED AFTER INVOL-
UNTARY
CONVERSION.—If the basis of the
property sold or exchanged is determined (in
whole or in part) under section 1033(b) (relat-
ing to basis of property acquired through invol-
untary 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) RECOGNITION OF GAIN ATTRIBUTABLE TO
DEPRECIATION.—Subsection (a) shall not apply to
so much of the gain from the sale of any property
as does not exceed the portion of the depreciation
adjustments (as defined in section 1250(b)(3)) at-
tributable to periods after December 31, 1996, in re-
spect of such property.
‘‘(6) DETERMINATION OF USE DURING PERIODS
OF OUT-OF-RESIDENCE CARE.—In the case of a tax-
payer who—
‘‘(A) becomes physically or mentally in-
capable 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 pe-
riods 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 tax-
payer 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.
‘‘(7) DETERMINATION OF MARITAL STATUS.—
In the case of any sale or exchange, for purposes of
this section—
‘‘(A) the determination of whether an indi-
vidual 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 sepa-
rate maintenance shall not be considered as
married.
‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—
This section shall not apply to any sale or exchange by
an individual if the treatment provided by section
877(a)(1) applies to such individual.
‘‘(f) ELECTION TO HAVE SECTION NOT APPLY.—
This section shall not apply to any sale or exchange with
respect to which the taxpayer elects not to have this sec-
tion apply.
‘‘(g) RESIDENCES ACQUIRED IN ROLLOVERS UNDER
SECTION 1034.—For purposes of this section, in the case
of property the acquisition of which by the taxpayer re-
sulted under section 1034 (as in effect on the day before
the date of the enactment of this sentence) in the non-
recognition of any part of the gain realized on the sale
or exchange of another residence, in determining the pe-
riod for which the taxpayer has owned and used such
property as the taxpayer’s principal residence, there shall
be included the aggregate periods for which such other
residence (and each prior residence taken into account
under section 1223(7) in determining the holding period
of such property) had been so owned and used.’’
(b) REPEAL
OF NONRECOGNITION
OF GAIN
ON
ROLLOVER OF PRINCIPAL RESIDENCE.—Section 1034 of
such Code (relating to rollover of gain on sale of principal
residence) is hereby repealed.
(c) CONFORMING AMENDMENTS.—
(1) The following provisions of the Internal
Revenue Code of 1986 are each amended by striking
‘‘section 1034’’ and inserting ‘‘section 121’’: sections
25(e)(7), 
56(e)(1)(A), 
56(e)(3)(B)(i),
143(i)(1)(C)(i)(I), 
163(h)(4)(A)(i)(I),
280A(d)(4)(A), 
464(f)(3)(B)(i), 
1033(h)(3),
1274(c)(3)(B), 6334(a)(13), and 7872(f)(11)(A).
(2) Paragraph (4) of section 32(c) of such Code
is amended by striking ‘‘(as defined in section
1034(h)(3))’’ and by adding at the end the following
new sentence: ‘‘For purposes of the preceding sen-
tence, the term ‘extended active duty’ means any pe-