‘‘(4) NO CREDITS AGAINST TAX.—Any increase 
in tax under this subsection shall not be treated as 
a tax imposed by this chapter for purposes of deter-
mining the amount of any credit under this chapter 
or for purposes of section 55. 
‘‘(5) DEATH OF OWNER; CASUALTY LOSS; IN-
VOLUNTARY CONVERSION; ETC.—The provisions of 
paragraph (1) do not apply to— 
‘‘(A) a disposition of a qualified residence 
made on account of the death of any individual 
having a legal or equitable interest therein oc-
curring during the 5-year period to which ref-
erence is made under paragraph (1), 
‘‘(B) a disposition of the old qualified resi-
dence if it is substantially or completely de-
stroyed by a casualty described in section 
165(c)(3) or compulsorily or involuntarily con-
verted (within the meaning of section 1033(a)), 
or 
‘‘(C) a disposition pursuant to a settlement 
in a divorce or legal separation proceeding 
where the qualified residence is sold or the 
other spouse retains such residence. 
‘‘(g) BASIS ADJUSTMENT.—For purposes of this sub-
title, if a credit is allowed under this section with respect 
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to the purchase of any residence, the basis of such resi-
dence shall be reduced by the amount of the credit so al-
lowed.’’. 
(b) CONFORMING AMENDMENTS.— 
(1) Subsection (a) of section 1016 (relating to 
general rule for adjustments to basis) is amended by 
striking ‘‘and’’ at the end of paragraph (36), by 
striking the period at the end of paragraph (37) and 
inserting ‘‘, and’’, and by adding at the end the fol-
lowing new paragraph: 
‘‘(38) in the case of a residence with respect to 
which a credit was allowed under section 25E, to the 
extent provided in section 25E(g).’’. 
(2) Section 23(b)(4)(B) is amended by inserting 
‘‘and section 25E’’ after ‘‘other than this section’’. 
(3) Section 23(c)(1) is amended by inserting ‘‘, 
25E, ’’ after ‘‘25D’’. 
(4) Section 24(b)(3)(B) is amended by striking 
‘‘23 and 25B’’ and inserting ‘‘23, 25B, and 25E’’. 
(5) Section 25(e)(1)(C) is amended by inserting 
‘‘25E,’’ after ‘‘25D,’’. 
(6) Section 25B(g) is amended by striking ‘‘sec-
tion 23’’ and inserting ‘‘sections 23 and 25E’’. 
(7) Section 25D(c)(1) is amended by inserting 
‘‘and section 25E’’ after ‘‘other than this section’’. 
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(8) Section 25D(c)(2) is amended by striking 
‘‘and 25B’’ inserting ‘‘25B, and 25E’’. 
(9) Section 26(a)(1) is amended by striking 
‘‘and 25B’’ and inserting ‘‘25B, and 25E’’. 
(10) Section 1400C(d)(1) is amended by strik-
ing ‘‘section 25D’’ and inserting ‘‘sections 25D and 
25E’’. 
(11) Section 1400C(d)(2) is amended by strik-
ing ‘‘and 25D’’ and inserting ‘‘25D, and 25E’’. 
(12) The table of sections for subpart A of part 
IV of subchapter A of chapter 1 is amended by in-
serting before the item relating to section 26 the fol-
lowing new item: 
‘‘Sec. 25E. Purchase of residences by certain rural homebuyers.’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to purchases after the date of the 
enactment of this Act, in taxable years ending after such 
date. 
SEC. 103. CAPITAL LOSS DEDUCTION ALLOWED WITH RE-
SPECT TO SALE OR EXCHANGE OF PRINCIPAL 
RESIDENCE IN CERTAIN RURAL AREAS. 
(a) IN GENERAL.—Subsection (c) of section 165 (re-
lating to limitation on losses of individuals) is amended— 
(1) by striking ‘‘and’’ at the end of paragraph 
(2), 
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(2) by striking the period at the end of para-
graph (3) and inserting ‘‘; and’’, and 
(3) by adding at the end the following new 
paragraph: 
‘‘(4) losses arising from the sale or exchange of 
the principal residence (within the meaning of sec-
tion 121) of the taxpayer located in a qualifying 
county (as defined in section 25E(c)(2)), but only if 
the principal residence was acquired by the taxpayer 
after the date of enactment of this paragraph.’’. 
(b) CONFORMING AMENDMENT.—Section 67(b)(3) is 
amended by striking ‘‘paragraph (2) or (3)’’ and inserting 
‘‘paragraph (2), (3), or (4)’’. 
(c) EFFECTIVE DATE.—The amendments made by 
this section shall apply to sales and exchanges after the 
date of the enactment of this Act, in taxable years ending 
after such date. 
SEC. 104. INDIVIDUAL HOMESTEAD ACCOUNTS. 
(a) IN GENERAL.—Subchapter F of chapter 1 (relat-
ing to exempt organizations) is amended by adding at the 
end the following new part: 
‘‘PART IX—INDIVIDUAL HOMESTEAD ACCOUNTS 
‘‘Sec. 530A. Individual homestead accounts. 
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‘‘SEC. 530A. INDIVIDUAL HOMESTEAD ACCOUNTS. 
‘‘(a) GENERAL RULE.—An individual homestead ac-
count shall be exempt from taxation under this subtitle. 
Notwithstanding the preceding sentence, any individual 
homestead account shall be subject to the taxes imposed 
by section 511 (relating to imposition of tax on unrelated 
business income of charitable, etc., organizations). 
‘‘(b) INDIVIDUAL HOMESTEAD ACCOUNT.—For pur-
poses of this title, the term ‘individual homestead account’ 
means a trust created or organized in the United States 
for the exclusive benefit of a qualified individual or his 
beneficiaries, but only if the written governing instrument 
creating the trust meets the following requirements: 
‘‘(1) Except in the case of a qualified rollover 
(as defined in subsection (f)(7))— 
‘‘(A) no contribution will be accepted un-
less it is in cash, 
‘‘(B) contributions will not be accepted for 
the taxable year in excess of $2,500 (deter-
mined without regard to any contribution made 
under subsection (d)), and 
‘‘(C) contributions will not be accepted for 
any taxable year following the fifth taxable year 
in which the qualified individual has contributed 
to any individual homestead account. 
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‘‘(2) The requirements of paragraphs (2) 
through (6) of section 408(a) are met. 
‘‘(c) QUALIFIED INDIVIDUAL; QUALIFYING COUN-
TY.—For purposes of this section— 
‘‘(1) QUALIFIED INDIVIDUAL.—The term ‘quali-
fied individual’ means, for any taxable year, an indi-
vidual who is a bona fide resident of a qualifying 
county. 
‘‘(2) QUALIFYING COUNTY.—The term ‘quali-
fying county’ means any county which— 
‘‘(A) is outside a metropolitan statistical 
area (defined as such by the Office of Manage-
ment and Budget), and 
‘‘(B) during the 20-year period ending 
with the calendar year preceding the date of the 
enactment of this section, has a net out-migra-
tion of inhabitants from the county of at least 
10 percent of the population of the county at 
the beginning of such period. 
‘‘(d) MATCHING CONTRIBUTIONS
TO INDIVIDUAL 
HOMESTEAD ACCOUNTS.— 
‘‘(1) IN GENERAL.—Not less than once each 
taxable year, the Secretary shall deposit (to the ex-
tent provided in appropriation Acts) into an indi-
vidual homestead account of each qualified indi-
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vidual an amount equal to the applicable percentage 
of the sum of the amounts deposited into all of the 
individual homestead accounts of such individual 
during such taxable year (determined without regard 
to any amount contributed under this subsection). 
‘‘(2) APPLICABLE PERCENTAGE.—For purposes 
of this subsection, the applicable percentage with re-
spect to any qualified individual for any taxable year 
shall be determined in accordance with the following 
tables: 
‘‘(A) In the case of a married individual 
(as defined in section 7703) filing a joint re-
turn: 
‘‘If modified adjusted gross 
The applicable 
income is: 
percentage is: 
$30,000 or less .........................................................................
Over $30,000 but not over $60,000 ........................................
Over $60,000 but not over $100,000 ......................................
12.5
Over $100,000 .........................................................................
zero. 
‘‘(B) In the case of a head of household 
(as defined in section 2(b)): 
‘‘If modified adjusted gross 
The applicable 
income is: 
percentage is: 
$22,500 or less .........................................................................
Over $22,500 but not over $45,000 ........................................
Over $45,000 but not over $75,000 ........................................
12.5
Over $75,000 ...........................................................................
zero. 
‘‘(C) In the case of any other individual: 
‘‘If modified adjusted gross 
The applicable 
income is: 
percentage is: 
$15,000 or less .........................................................................
Over $15,000 but not over $30,000 ........................................
Over $30,000 but not over $50,000 ........................................
12.5
Over $50,000 ...........................................................................
zero. 
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For purposes of this paragraph, the term ‘modified 
adjusted gross income’ has the meaning given such 
term by section 86(b)(2). 
‘‘(3) EXCLUSION
FROM
INCOME.—Except as 
otherwise provided in this section, gross income shall 
not include any amount deposited into an individual 
homestead account under paragraph (1). 
‘‘(4) FORFEITURE
OF
MATCHING
CONTRIBU-
TIONS IN THE CASE OF CERTAIN DISTRIBUTIONS.— 
In the event of a distribution from an individual 
homestead account before the date described in sub-
section (f)(1)(A) (other than a distribution described 
in subsection (e)(2)(A)), the account holder shall 
forfeit the corresponding matching contributions and 
interest earned on the matching contributions, un-
less such distribution is recontributed to such ac-
count within 6 months of such distribution. 
‘‘(e) TAX TREATMENT OF DISTRIBUTIONS.— 
‘‘(1) INCLUSION
OF
AMOUNTS
IN
GROSS
IN-
COME.—Except as otherwise provided in this sub-
section, any amount paid or distributed out of an in-
dividual homestead account shall be includible in the 
gross income of the payee or distributee, as the case 
may be, in the manner as provided in section 72. 
For purposes of the preceding sentence, distributions 
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which are includible in gross income shall be treated 
as first attributable to amounts contributed under 
subsection (d) to the extent thereof. 
‘‘(2) EXCLUSION OF CATASTROPHIC MEDICAL 
EXPENSE DISTRIBUTIONS IN FIRST FIVE YEARS AND 
QUALIFIED INDIVIDUAL HOMESTEAD DISTRIBUTIONS 
THEREAFTER.—Paragraph (1) shall not apply to— 
‘‘(A) any distribution described in section 
72(t)(2)(B) before the date described in sub-
section (f)(1)(A), but only to the extent such 
distribution does not exceed the balance in the 
account as of the date of such distribution, re-
duced by any matching contribution under sub-
section (d), and 
‘‘(B) any qualified individual homestead 
distribution. 
‘‘(f) QUALIFIED INDIVIDUAL HOMESTEAD DISTRIBU-
TION.—For purposes of this section— 
‘‘(1) IN GENERAL.—The term ‘qualified indi-
vidual homestead distribution’ means any amount 
paid or distributed out of an individual homestead 
account which would otherwise be includible in gross 
income, to the extent that such payment or distribu-
tion— 
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‘‘(A) is paid or distributed after the 5-tax-
able year period beginning with the first taxable 
year in which the qualified individual made a 
contribution to the individual homestead ac-
count (including any predecessor account), and 
‘‘(B) is used exclusively to pay qualified in-
dividual homestead expenses for the qualified 
individual or the spouse or dependent (as de-
fined in section 152) of such individual. 
‘‘(2) QUALIFIED INDIVIDUAL HOMESTEAD EX-
PENSES.—The term ‘qualified individual homestead 
expenses’ means any of the following: 
‘‘(A) Qualified higher education expenses. 
‘‘(B) Qualified first-time homebuyer costs. 
‘‘(C) 
Qualified 
business 
capitalization 
costs. 
‘‘(D) Qualified medical expenses. 
‘‘(E) Qualified rollovers. 
‘‘(3) QUALIFIED
HIGHER
EDUCATION
EX-
PENSES.— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
higher education expenses’ has the meaning 
given such term by section 72(t)(7), determined 
by treating postsecondary vocational edu-
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cational schools as eligible educational institu-
tions. 
‘‘(B) POSTSECONDARY VOCATIONAL EDU-
CATION SCHOOL.—The term ‘postsecondary vo-
cational educational school’ means an area vo-
cational education school (as defined in sub-
paragraph (C) or (D) of section 521(4) of the 
Carl D. Perkins Vocational and Applied Tech-
nology Education Act (20 U.S.C. 2471(4))) 
which is in any State (as defined in section 
521(33) of such Act), as such sections are in 
effect on the date of the enactment of this sec-
tion. 
‘‘(C) COORDINATION WITH OTHER BENE-
FITS.—The amount of qualified higher edu-
cation expenses for any taxable year shall be re-
duced as provided in section 25A(g)(2). 
‘‘(4) 
QUALIFIED
FIRST-TIME
HOMEBUYER 
COSTS.—The term ‘qualified first-time homebuyer 
costs’ means qualified acquisition costs (as defined 
in section 72(t)(8) without regard to subparagraph 
(B) thereof) with respect to a principal residence 
(within the meaning of section 121) located in a 
qualifying county for a qualified first-time home-
buyer (as defined in section 72(t)(8)). 
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‘‘(5) QUALIFIED
BUSINESS
CAPITALIZATION 
COSTS.— 
‘‘(A) IN
GENERAL.—The term ‘qualified 
business capitalization costs’ means qualified 
expenditures for the capitalization of a qualified 
business pursuant to a qualified plan. 
‘‘(B) 
QUALIFIED
EXPENDITURES.—The 
term ‘qualified expenditures’ means expendi-
tures included in a qualified plan, including 
capital, plant, equipment, working capital, and 
inventory expenses. 
‘‘(C) QUALIFIED
BUSINESS.—The term 
‘qualified business’ means any trade or business 
located in a qualifying county other than any 
trade or business— 
‘‘(i) which consists of the operation of 
any 
facility 
described 
in 
section 
144(c)(6)(B), or 
‘‘(ii) which contravenes any law. 
Rules similar to the rules under subsection (b) 
or (c) of section 1397C shall apply to any quali-
fied business under this section. 
‘‘(D) QUALIFIED PLAN.—The term ‘quali-
fied plan’ means a business plan which meets 
such requirements as the Secretary may specify. 
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‘‘(6) QUALIFIED
MEDICAL
EXPENSES.—The 
term ‘qualified medical expenses’ means any amount 
paid during the taxable year, not compensated for by 
insurance or otherwise, for medical care (as defined 
in section 213(d)) of the taxpayer, his spouse, or his 
dependent (as defined in section 152). 
‘‘(7) QUALIFIED ROLLOVERS.—The term ‘quali-
fied rollover’ means any amount paid from an indi-
vidual homestead account of a taxpayer into another 
such account established for the benefit of— 
‘‘(A) such taxpayer, or 
‘‘(B) any qualified individual who is— 
‘‘(i) the spouse of such taxpayer, or 
‘‘(ii) any dependent (as defined in sec-
tion 152) of the taxpayer. 
Rules similar to the rules of section 408(d)(3) shall 
apply for purposes of this paragraph. 
‘‘(g) TAX TREATMENT OF ACCOUNTS.— 
‘‘(1) LOSS OF EXEMPTION IN CASE OF PROHIB-
ITED TRANSACTIONS.—For purposes of this section, 
rules similar to the rules of section 408(e) shall 
apply. 
‘‘(2) OTHER RULES TO APPLY.—Rules similar 
to the rules of paragraphs (4), (5), and (6) of sec-
tion 408(d) shall apply for purposes of this section. 
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‘‘(h) OTHER DEFINITIONS AND SPECIAL RULES.— 
For purposes of this section— 
‘‘(1) ALL
ACCOUNTS
TREATED
AS
ONE
AC-
COUNT.—All individual homestead accounts of a 
qualified individual shall be treated as 1 account. 
‘‘(2) TIME
WHEN
CONTRIBUTIONS
DEEMED 
MADE.—A taxpayer shall be deemed to have made a 
contribution to an individual homestead account on 
the last day of the preceding taxable year if the con-
tribution is made on account of such taxable year 
and is made not later than the time prescribed by 
law for filing the return for such taxable year (not 
including extensions thereof). 
‘‘(3) CUSTODIAL ACCOUNTS.—Rules similar to 
the rules of section 408(h) shall apply. 
‘‘(4) REPORTS.—The trustee of an individual 
homestead account shall make such reports regard-
ing such account to the Secretary and to the indi-
vidual for whom the account is maintained with re-
spect to contributions (and the years to which they 
relate), distributions, and such other matters as the 
Secretary may require under regulations. The re-
ports required by this paragraph— 
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‘‘(A) shall be filed at such time and in 
such manner as the Secretary prescribes in 
such regulations, and 
‘‘(B) shall be furnished to individuals— 
‘‘(i) not later than January 31 of the 
calendar year following the calendar year 
to which such reports relate, and 
‘‘(ii) in such manner as the Secretary 
prescribes in such regulations. 
‘‘(5) INVESTMENT IN COLLECTIBLES TREATED 
AS DISTRIBUTIONS.—Rules similar to the rules of 
section 408(m) shall apply. 
‘‘(i) DESIGNATION OF EARNED INCOME TAX CREDIT 
PAYMENTS FOR DEPOSIT TO INDIVIDUAL HOMESTEAD 
ACCOUNT.— 
‘‘(1) IN GENERAL.—With respect to the return 
of any qualified individual for the taxable year of the 
tax imposed by this chapter, such individual may 
designate that a specified portion (not less than $1) 
of any overpayment of tax for such taxable year 
which is attributable to the earned income tax credit 
shall be deposited by the Secretary into an individual 
homestead account of such individual. The Secretary 
shall so deposit such portion designated under this 
subsection. 
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‘‘(2) MANNER AND TIME OF DESIGNATION.—A 
designation under paragraph (1) may be made with 
respect to any taxable year— 
‘‘(A) at the time of filing the return of the 
tax imposed by this chapter for such taxable 
year, or 
‘‘(B) at any other time (after the time of 
filing the return of the tax imposed by this 
chapter for such taxable year) specified in regu-
lations prescribed by the Secretary. 
Such designation shall be made in such manner as 
the Secretary prescribes by regulations. 
‘‘(3) PORTION ATTRIBUTABLE TO EARNED IN-
COME
TAX
CREDIT.—For purposes of this sub-
section, an overpayment for any taxable year shall 
be treated as attributable to the earned income tax 
credit to the extent that such overpayment does not 
exceed the credit allowed to the taxpayer under sec-
tion 32 for such taxable year. 
‘‘(4) 
OVERPAYMENTS
TREATED
AS
RE-
FUNDED.—For purposes of this title, any portion of 
an overpayment of tax designated under paragraph 
(1) shall be treated as being refunded to the tax-
payer as of the last date prescribed for filing the re-
turn of tax imposed by this chapter (determined 
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without regard to extensions) or, if later, the date 
the return is filed. 
‘‘(j) PENALTY FOR DISTRIBUTIONS NOT USED FOR 
QUALIFIED INDIVIDUAL HOMESTEAD EXPENSES.— 
‘‘(1) IN GENERAL.—If any amount is distrib-
uted from an individual homestead account and is 
not used exclusively to pay qualified individual 
homestead expenses for the holder of the account or 
the spouse or dependent (as defined in section 152) 
of such holder, the tax imposed by this chapter for 
the taxable year of such distribution shall be in-
creased by 10 percent of such amount which is in-
cludible in gross income. For purposes of the pre-
ceding sentence, distributions which are includible in 
gross income shall be treated as first attributable to 
amounts contributed under subsection (d) to the ex-
tent thereof. 
‘‘(2) EXCEPTION
FOR
CERTAIN
DISTRIBU-
TIONS.—Paragraph (1) shall not apply to distribu-
tions which are— 
‘‘(A) made on or after the date on which 
the account holder attains age 591/2, 
‘‘(B) made to a beneficiary (or the estate 
of the account holder) on or after the death of 
the account holder, 
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‘‘(C) attributable to the account holder’s 
being disabled within the meaning of section 
72(m)(7), or 
‘‘(D) described in subsection (e)(2)(A). 
‘‘(k) APPLICATION OF SECTION.—This section shall 
apply to amounts paid to an individual homestead account 
for any taxable year beginning after the date of the enact-
ment of the New Homestead Act of 2006.’’. 
(b) TAX ON EXCESS CONTRIBUTIONS.— 
(1) TAX IMPOSED.—Subsection (a) of section 
4973 is amended by striking ‘‘or’’ at the end of 
paragraph (4), by redesignating paragraph (5) as 
paragraph (6), and by inserting after paragraph (4) 
the following new paragraph: 
‘‘(5) an individual homestead account (within 
the meaning of section 530A(b)), or’’. 
(2) EXCESS CONTRIBUTIONS.—Section 4973 is 
amended by adding at the end the following sub-
section: 
‘‘(h) INDIVIDUAL HOMESTEAD ACCOUNTS.—For pur-
poses of this section, in the case of individual homestead 
accounts, the term ‘excess contributions’ means the sum 
of— 
‘‘(1) the excess (if any) of— 
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‘‘(A) the amount contributed for the tax-
able year to the accounts (other than a quali-
fied rollover, as defined in section 530A(f)(7), 
or a contribution under section 530A(d)), over 
‘‘(B) the amount allowable under section 
530A for such contributions, and 
‘‘(2) the amount determined under this sub-
section for the preceding taxable year reduced by the 
sum of— 
‘‘(A) the distributions out of the accounts 
for the taxable year which were included in the 
gross income of the payee under section 
530A(e)(1), 
‘‘(B) the distributions out of the accounts 
for the taxable year to which rules similar to 
the rules of section 408(d)(5) apply by reason 
of section 530A(g)(2), and 
‘‘(C) the excess (if any) of the maximum 
amount allowable as a contribution under sec-
tion 530A for the taxable year over the amount 
contributed to the account for the taxable year 
(other than a contribution under section 
530A(d)). 
For purposes of this subsection, any contribution which 
is distributed from the individual homestead account in 
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