‘‘(2) 
QUALIFIED
PRINCIPAL
RESIDENCE
GAIN.—For purposes of this subsection—
‘‘(A) IN
GENERAL.—The term ‘qualified
principal residence gain’ means the amount of
gain from the sale or exchange of a qualified
principal residence during the taxable year, re-
duced by—
‘‘(i) the amount of gain not included
in gross income pursuant to an election
under section 121 (relating to one-time ex-
clusion of gain from sale of principal resi-
dence by individual who has attained age
55) with respect to such sale or exchange,
and
‘‘(ii) the amount of gain not recog-
nized with respect to such sale or exchange
under section 1034 (relating to rollover of
gain on sale of principal residence).
‘‘(B) LIMITATION.—In no event may the
qualified principal residence gain exceed the
lesser of—
‘‘(i) $90,000, or
‘‘(ii) the net capital gain for the tax-
able year.
‘‘(C) QUALIFIED PRINCIPAL RESIDENCE.—
The term ‘qualified principal residence’ means a
principal residence (within the meaning of sec-
tion 1034) with respect to which the taxpayer
meets the requirements of 121(a)(2) (deter-
mined after the application of section 121(d)).
‘‘(D) PROPERTY USED IN PART AS PRIN-
CIPAL RESIDENCE.—Rules similar to the rules
of section 121(d)(5) shall apply.
‘‘(3) COORDINATION
WITH
INVESTMENT
IN-
COME ELECTION.—For purposes of this subsection,
the net capital gain for any taxable year shall be re-
duced (but not below zero) by the amount which the
taxpayer elects to take into account as investment
income 
for 
the 
taxable 
year 
under 
section
163(d)(4)(B)(iii).’’
(b) EFFECTIVE DATE.—The amendment made by
this section shall apply to gain from sales or exchanges
of principal residences after December 31, 1996, for tax-
able years beginning after such date.
SEC. 5. INDEXED BASIS OF PRIMARY RESIDENCE.
(a) IN GENERAL.—Part II of subchapter O of chap-
ter 1 of the Internal Revenue Code of 1986 (relating to
basis rules of general application) is amended by inserting
after section 1021 the following new section:
‘‘SEC. 1022. ADJUSTED BASIS OF PRINCIPAL RESIDENCE.
‘‘(a) IN GENERAL.—In the case of an individual, the
adjusted basis for determining the gain from the sale or
exchange of the principal residence (within the meaning
of section 1034) of such individual shall be the indexed
basis of such principal residence.
‘‘(b) INDEXED BASIS.—For purposes of this section,
the indexed basis of any principal residence is the sum
of—
‘‘(1) the adjusted basis (determined without re-
gard to this section) of such residence, and
‘‘(2) the applicable inflation adjustment.
‘‘(c) APPLICABLE INFLATION ADJUSTMENT.—For
purposes of this section, the term ‘applicable inflation ad-
justment’ means, for any principal residence, an amount
equal to the product of—
‘‘(1) the adjusted basis (determined without re-
gard to this section) of such residence, and
‘‘(2) the percentage (if any) by which—
‘‘(A) the gross domestic product deflator
for the last calendar quarter ending before such
residence is sold or exchanged, exceeds
‘‘(B) the gross domestic product deflator
for the last calendar quarter ending before such
residence was acquired by the taxpayer.
The percentage under paragraph (2) shall be rounded to
the nearest 1⁄10 of 1 percentage point.
‘‘(d) GROSS DOMESTIC PRODUCT DEFLATOR.—For
purposes of this section, the gross domestic product
deflator for any calendar quarter is the implicit price
deflator for the gross domestic product for such quarter
(as shown in the last revision thereof released by the Sec-
retary of Commerce before the close of the following cal-
endar quarter).
‘‘(e) TREATMENT
OF IMPROVEMENTS
TO PROP-
ERTY.—If there is an addition to the adjusted basis of
a principal residence during a taxable year by reason of
an improvement to such residence, and the aggregate
amount thereof during the taxable year with respect to
such residence is $1,000 or more, such improvement shall
be separately indexed under subsections (b) and (c) as if
the improvement were a separate residence acquired at the
close of such taxable year, in accordance with regulations
prescribed by the Secretary.’’
(b) CLERICAL AMENDMENT.—The table of sections
for part II of subchapter O of chapter 1 of such Code
is amended by inserting after the item relating to section
1021 the following new item:
‘‘Sec. 1022. Adjusted basis of principal residence.’’
(c) EFFECTIVE DATE.—The amendments made by
this section shall apply to residences sold or exchanged
after December 31, 1996, for taxable years beginning
after such date.
Æ