143
‘‘(B) ASSUMPTION AND RELEASE OF LI-
ABILITY.—The Secretary shall prescribe regula-
tions 
addressing 
the 
consequences 
of 
a
distributee’s assumption of the liabilities of the
distributor.
‘‘SEC. 76. 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 aggre-
gating 2 years or more.
‘‘(b) LIMITATIONS.—
‘‘(1) IN GENERAL.—The amount of gain ex-
cluded from gross income under subsection (a) with
respect to any sale or exchange shall not exceed
$250,000.
‘‘(2) $500,000 LIMITATION FOR CERTAIN JOINT
RETURNS.—Paragraph (1) shall be applied by sub-
stituting ‘$500,000’ for ‘$250,000’ if—
‘‘(A) a husband and wife make a joint re-
turn for the taxable year of the sale or ex-
change of the property,
144
‘‘(B) either spouse meets the ownership re-
quirements of subsection (a) with respect to
such property,
‘‘(C) both spouses meet the use require-
ments of subsection (a) with respect to such
property, and
‘‘(D) neither spouse is ineligible for the
benefits of subsection (a) with respect to such
property by reason of paragraph (3).
‘‘(3) 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 to which
subsection (a) applied.
‘‘(B) PRE-MAY 7, 1997, SALES NOT TAKEN
INTO
ACCOUNT.—Subparagraph (A) shall be
applied without regard to any sale or exchange
before May 7, 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-
145
ship and use requirements of subsection (a) shall not
apply and subsection (b)(3) shall not apply; but the
amount of gain excluded from gross income under
subsection (a) with respect to such sale or exchange
shall not exceed—
‘‘(A) the amount which bears the same
ratio to the amount which would be so excluded
under this section 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 to which subsection (a) applied
and before the date of such sale or ex-
change,
bears to 2 years.
‘‘(2) SALES AND EXCHANGES TO WHICH SUB-
SECTION APPLIES.—This subsection shall apply to
any sale or exchange if—
146
‘‘(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)(3), and
‘‘(B) such sale or exchange is by reason of
a change in place of employment, health, or, to
the extent provided in regulations, unforeseen
circumstances.
‘‘(d) SPECIAL RULES.—
‘‘(1) JOINT RETURNS.—If a husband and wife
make a joint return for the taxable year of the sale
or exchange of the property, subsections (a) and (c)
shall apply 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 and used such property
shall include the period such deceased spouse owned
and used such property before death.
147
‘‘(3) PROPERTY OWNED BY SPOUSE OR FORMER
SPOUSE.—For purposes of this section—
‘‘(A) PROPERTY TRANSFERRED TO INDI-
VIDUAL FROM SPOUSE OR FORMER SPOUSE.—
In the case of an individual holding property
transferred to such individual by such individ-
ual’s spouse or former spouse in a transaction
incident to divorce, the period such individual
owns such property shall include the period the
transferor owned the property.
‘‘(B) PROPERTY USED BY FORMER SPOUSE
PURSUANT TO DIVORCE DECREE, ETC.—Solely
for purposes of this section, an individual shall
be treated as using property as such individ-
ual’s principal residence during any period of
ownership while such individual’s spouse or
former spouse is granted use of the property
under a divorce or separation instrument.
‘‘(4) TENANT-STOCKHOLDER IN COOPERATIVE
HOUSING CORPORATION.—For purposes of this sec-
tion, if the taxpayer holds stock as a tenant-stock-
holder in a cooperative housing corporation—
‘‘(A) the holding requirements of sub-
section (a) shall be applied to the holding of
such stock, and
148
‘‘(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.
‘‘(5) INVOLUNTARY
CONVERSIONS.—For pur-
poses of this section, the destruction, theft, seizure,
requisition, or condemnation of property shall be
treated as the sale 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.
149
‘‘(7) SALES OF REMAINDER INTERESTS.—For
purposes of this section—
‘‘(A) IN GENERAL.—At the election of the
taxpayer, this section shall not fail to apply to
the sale or exchange of an interest in a prin-
cipal residence by reason of such interest being
a remainder interest in such residence, but this
section shall not apply to any other interest in
such residence which is sold or exchanged sepa-
rately.
‘‘(B) EXCEPTION FOR SALES TO RELATED
PARTIES.—Subparagraph (A) shall not apply to
any sale to, or exchange with, a related party
(as defined in section 171).
‘‘(e) DENIAL OF EXCLUSION FOR EXPATRIATES.—
This section shall not apply to any sale or exchange by
an individual if rules relating to expatriation to avoid tax
apply 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-
150
sulted under section 1034 of the Internal Revenue Code
of 1986 (as in effect on the day before the date of the
enactment of the Taxpayer Relief Act of 1997) 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 in
determining the holding period of such property) had been
so owned and used.
‘‘SEC. 77. OTHER NONRECOGNITION TRANSACTIONS.
‘‘(a) INVOLUNTARY CONVERSIONS.—Under regula-
tions prescribed by the Secretary, the involuntary conver-
sion of property held by an individual shall not result in
gross income to the individual to the extent that the indi-
vidual receives property in exchange for the involuntarily
converted property. To the extent that income is not rec-
ognized under this subsection, the taxpayer’s basis in the
converted property shall carry over to the new property.
‘‘(b) CERTAIN REACQUISITIONS
OF REAL PROP-
ERTY.—Under regulations prescribed by the Secretary,
gross income shall not be recognized in the case of certain
reacquisitions of real property. The regulations shall adopt
151
principles similar to those under section 1038 of the Inter-
nal Revenue Code of 1986.
‘‘(c) TRANSFERS OF PROPERTY BETWEEN SPOUSES
OR INCIDENT TO DIVORCE.—
‘‘(1) GENERAL RULE.—Gross income shall not
be recognized on the transfer of property from an
individual to (or in trust for the benefit of)—
‘‘(A) a spouse, or
‘‘(B) a former spouse, but only if the
transfer is incident to divorce.
‘‘(2) TRANSFER
TREATED
AS
A
GIFT.—
Any transfer described in paragraph (1) shall
be treated as a gift.
‘‘(d) CERTAIN EXCHANGES
OF INSURANCE POLI-
CIES.—Under regulations prescribed by the Secretary,
gross income shall not be recognized on the exchange of
insurance policies or another life insurance policy or an
annuity contract or the exchange of annuity contracts.
The regulations shall adopt principles similar to those
under section 1035 of the Internal Revenue Code of 1986.
‘‘(e) CERTAIN EXCHANGES OF UNITED STATES OB-
LIGATIONS.—When so provided by regulations promul-
gated by the Secretary in connection with the issue of obli-
gations of the United States, no gain or loss shall be rec-
ognized on the surrender to the United States of obliga-
152
tions of the United States issued under chapter 31 of title
31 in exchange solely for other obligations issued under
such chapter.
‘‘SEC. 78. WASH SALES AND STRADDLES.
‘‘(a) LOSSES FROM WASH SALES OF STOCK OR SE-
CURITIES.—Under regulations prescribed by the Sec-
retary, no loss shall be recognized on the wash sale of
stock or securities. The regulations shall adopt principles
similar to those under section 1091 of the Internal Rev-
enue Code of 1986.
‘‘(b) STRADDLES.—Under regulations prescribed by
the Secretary, the loss that can be taken into account from
1 or more straddle positions shall be limited. The regula-
tions shall adopt principles similar to those under section
1038 of the Internal Revenue Code of 1986.
‘‘SEC. 79. LIMITATION ON LOSSES FROM CAPITAL TRANS-
ACTIONS.
‘‘(a) NO LOSS ON PERSONAL USE PROPERTY.—No
loss shall be recognized on the sale or exchange of personal
use property (as defined in section 210(b)(3)(B)).
‘‘(b) LIMITATION ON NET CAPITAL LOSS.—
‘‘(1) IN GENERAL.—Losses from sales or ex-
changes of capital assets in a taxable year shall be
allowed only to the extent of the gains from such