I
105TH CONGRESS
1ST SESSION
H. R. 1193
To amend the Internal Revenue Code of 1986 to allow indexing of capital
assets for purposes of determining gain or loss and to allow an exclusion
of gain from the sale of a principal residence.
IN THE HOUSE OF REPRESENTATIVES
MARCH 20, 1997
Mr. ROYCE 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 allow index-
ing of capital assets for purposes of determining gain
or loss and to allow an exclusion of gain from the 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. INDEXING OF CAPITAL ASSETS.
(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. INDEXING OF CERTAIN ASSETS FOR PURPOSES
OF DETERMINING GAIN OR LOSS.
‘‘(a) IN GENERAL.—
‘‘(1) INDEXED
BASIS
SUBSTITUTED
FOR
AD-
JUSTED
BASIS.—Except as otherwise provided in
this section, if an indexed asset which the taxpayer
has held for 1 year or longer is sold or otherwise dis-
posed of, for purposes of this title the indexed basis
of the asset shall be substituted for its adjusted
basis.
‘‘(2) EXCEPTION
FOR
DEPRECIATION, ETC.—
The deductions for depreciation, depletion, and am-
ortization shall be determined without regard to the
application of paragraph (1) to the taxpayer or any
other person.
‘‘(b) INDEXED ASSET.—For purposes of this section,
the term ‘indexed asset’ means—
‘‘(1) stock in a corporation,
‘‘(2) bonds,
‘‘(3) tangible property which is property used in
the trade or business (as defined in section
1231(b)),
‘‘(4) land held in connection with a trade or
business (other than property described in section
1231(b)(1)(B)), and
‘‘(5) the principal residence (within the mean-
ing of section 1034) of the taxpayer.
‘‘(c) INDEXED BASIS.—For purposes of this sec-
tion—
‘‘(1) IN GENERAL.—The indexed basis of any
asset is—
‘‘(A) the adjusted basis of the asset, in-
creased by
‘‘(B) the applicable inflation adjustment.
‘‘(2) APPLICABLE INFLATION ADJUSTMENT.—
The applicable inflation adjustment for any asset is
an amount equal to—
‘‘(A) the adjusted basis of the asset, multi-
plied by
‘‘(B) the percentage (if any) by which—
‘‘(i) 
the 
gross 
domestic 
product
deflator for the calendar year in which the
asset is disposed of, exceeds
‘‘(ii) the gross domestic product
deflator for the calendar year in which the
asset was acquired by the taxpayer (or, if
later, for 1986).
The percentage under subparagraph (B) shall be
rounded to the nearest 1⁄10 of 1 percent.
‘‘(3) GROSS DOMESTIC PRODUCT DEFLATOR.—
The gross domestic product deflator for any cal-
endar year is the implicit price deflator for the gross
domestic product for such year (as shown in the
first revision thereof).
‘‘(d) NOT AN INDEXED ASSET AND HOLDING PE-
RIOD RESTARTED IF DIMINISHED RISK OF LOSS.—If the
taxpayer (or a related person) enters into any transaction
which substantially reduces the risk of loss from holding
any asset—
‘‘(1) such asset shall not be treated as an in-
dexed asset for the period of such reduced risk, and
‘‘(2) for purposes of determining whether the 1-
year holding requirement of subsection (a) has been
met, the taxpayer shall be treated as first acquiring
the asset on the day after the last day of such pe-
riod.
‘‘(e) PASS-THRU ENTITIES.—
‘‘(1) PARTNERSHIPS.—In the case of a partner-
ship, the adjustment made under subsection (a) at
the partnership level shall be passed through to the
partners.
‘‘(2) SUBCHAPTER
S
CORPORATIONS.—In the
case of an S corporation, the adjustment under sub-
section (a) at the corporate level shall be passed
through to the shareholders.
‘‘(3) COMMON TRUST FUNDS.—In the case of a
common trust fund, the adjustment made under sub-
section (a) at the trust level shall be passed through
to the participants.
‘‘(4) REGULATED INVESTMENT COMPANIES AND
REAL ESTATE INVESTMENT TRUSTS.—
‘‘(A) IN GENERAL.—Stock in a qualified
investment entity shall be an indexed asset for
any calendar month in the same ratio as the
fair market value of the assets held by such en-
tity at the close of such month which are in-
dexed assets bears to the fair market value of
all assets of such entity at the close of such
month.
‘‘(B) RATIO OF 90 PERCENT OR MORE.—If
the ratio for any calendar month determined
under subparagraph (A) would (but for this
subparagraph) be 90 percent or more, such
ratio for such month shall be 100 percent.
‘‘(C) RATIO OF 10 PERCENT OR LESS.—If
the ratio for any calendar month determined
under subparagraph (A) would (but for this
‘‘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 which has been
owned and used by the taxpayer as the taxpayer’s prin-
cipal residence.
‘‘(b) LIMITATION.—The amount of gain excluded
under subsection (a) with respect to any sale or exchange
shall not exceed $250,000 ($500,000 in the case of a joint
return).
‘‘(c) SPECIAL RULES.—
‘‘(1) PROPERTY HELD JOINTLY BY HUSBAND
AND WIFE.—For purposes of this section, if—
‘‘(A) property is held by a husband and
wife as joint tenants, tenants by the entirety, or
community property,
‘‘(B) such husband and wife make a joint
return under section 6013 for the taxable year
of the sale or exchange, and
‘‘(C) one spouse satisfies the holding and
use requirements of subsection (a) with respect
to such property,
then both husband and wife shall be treated as satis-
fying the holding 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, if the deceased
spouse satisfied the holding and use requirements of
subsection (a) with respect to such property then
such individual shall be treated as satisfying the
holding and use requirements of subsection (a) with
respect to such property.
‘‘(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.—For pur-
poses of this section, the destruction, theft, seizure,
requisition, or condemnation of property shall be
treated as the sale of such property.
‘‘(5) PROPERTY USED IN PART AS PRINCIPAL
RESIDENCE.—In the case of property only a portion
of which has been owned and used by the taxpayer
as his principal residence, this section shall apply
with respect to so much of the gain from the sale
or exchange of such property as is determined,
under regulations prescribed by the Secretary, to be
attributable to the portion of the property so owned
and used by the taxpayer.
‘‘(6) 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.
‘‘(7) APPLICATION
OF
SECTIONS
1033
AND
1034.—In applying sections 1033 (relating to invol-
untary conversions) and 1034 (relating to sale or ex-
change of residence), 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 an election under this
section.
‘‘(8) PROPERTY
ACQUIRED
AFTER
INVOLUN-
TARY
CONVERSION.—If the basis of the property
sold or exchanged is determined (in whole or in
part) under subsection (b) of section 1033 (relating
to basis of property acquired through involuntary
conversion), then the holding and use by the tax-
payer of the converted property shall be treated as
holding and use by the taxpayer of the property sold
or exchanged.
‘‘(9) 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 has previously
used such property as the taxpayer’s principal
residence,
then the taxpayer shall be treated as using such
property as the taxpayer’s principal residence during
any time in which the taxpayer 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.
‘‘(d) 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.’’
(b) CLERICAL AND CONFORMING AMENDMENTS.—
(1) Paragraph (3) of section 1033(k) of such
Code is amended to read as follows:
‘‘(3) For exclusion from gross income of gain
from involuntary conversion of principal residence,
see section 121.’’
(2) Subparagraph (A) of section 1038(e)(1) of
such Code is amended to read as follows:
‘‘(A) section 121 (relating to exclusion of
gain from sale or exchange of principal resi-
dence) applies, or’’.
(3) Subparagraph (B) of section 1250(d)(7) of
such Code is amended by striking ‘‘age and’’ and by
striking the parenthetical and inserting the follow-
ing: ‘‘(relating to exclusion of gain from sale of prin-
cipal residence)’’.
(4) The table of sections for part III of sub-
chapter B of chapter 1 of such Code is amended by