SECTION 1. INDEXING OF CAPITAL ASSETS.

    (a) In General.--Part II of subchapter O of chapter 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 adjusted 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 disposed 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 amortization 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 meaning of 
        section 1034) of the taxpayer.
    ``(c) Indexed Basis.--For purposes of this section--
            ``(1) In general.--The indexed basis of any asset is--
                    ``(A) the adjusted basis of the asset, increased 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, multiplied 
                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 calendar 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 Period 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 indexed 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 period.
    ``(e) Pass-Thru Entities.--
            ``(1) Partnerships.--In the case of a partnership, 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 subsection (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 subsection (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 entity at the close of such month 
                which are indexed 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 subparagraph) be 10 percent or 
                less, such ratio for such month shall be zero.
                    ``(D) Valuation of assets in case of real estate 
                investment trusts.--Nothing in this paragraph shall 
                require a real estate investment trust to value its 
                assets more frequently than once each 36 months (except 
                where such trust ceases to exist). The ratio under 
                subparagraph (A) for any calendar month for which there 
                is no valuation shall be the trustee's good faith 
                judgment as to such valuation.
                    ``(E) Qualified investment entity.--For purposes of 
                this paragraph, the term `qualified investment entity' 
                means--
                            ``(i) a regulated investment company 
                        (within the meaning of section 851), and
                            ``(ii) a real estate investment trust 
                        (within the meaning of section 856).
    ``(f) Dispositions Between Related Persons.--
            ``(1) In general.--This section shall not apply to any sale 
        or other disposition of property between related persons except 
        to the extent that the basis of such property in the hands of 
        the transferee is a substituted basis.
            ``(2) Related persons defined.--For purposes of this 
        section, the term `related persons' means--
                    ``(A) persons bearing a relationship set forth in 
                section 267(b), and
                    ``(B) persons treated as single employer under 
                subsection (b) or (c) of section 414.
    ``(g) Additions to Basis By Means of Improvements or Contributions 
to Capital.--If there is an addition to the adjusted basis of any 
tangible property or of any stock in a corporation during the taxable 
year by reason of an improvement to such property or a contribution to 
capital of such corporation, and the aggregate amount of such addition 
during the taxable year with respect to such property or stock is 
$10,000 or more, such addition shall be treated as a separate asset 
acquired at the close of such taxable year.
    ``(h) Section Cannot Increase Ordinary Loss.--To the extent that 
(but for this subsection) this section would create or increase a net 
ordinary loss to which section 1231(a)(2) applies or an ordinary loss 
to which any other provision of this title applies, such provision 
shall not apply. The taxpayer shall be treated as having a long-term 
capital loss in an amount equal to the amount of the ordinary loss to 
which the preceding sentence applies.
    ``(i) Special Rules.--
            ``(1) Assets which are not indexed assets throughout 
        holding period.--The applicable inflation ratio shall be 
        appropriately reduced for periods during which the asset was 
        not an indexed asset.
            ``(2) Treatment of certain distributions.--A distribution 
        with respect to stock in a corporation which is not a dividend 
        shall be treated as a disposition.
            ``(3) Acquisition date where prior application of 
        subsection (a)(1) with respect to such asset of taxpayer.--If 
        there has been a prior application of subsection (a)(1) to an 
        asset while such asset was held by the taxpayer, the date of 
        acquisition of such asset by the taxpayer shall be treated as 
        not earlier than the date of the most recent such prior 
        application.
            ``(4) Collapsible corporations.--The application of section 
        341(a) (relating to collapsible corporations) shall be 
        determined without regard to this section.
    ``(j) Transfers To Increase Indexing Adjustment or Depreciation 
Allowance.--If any person transfers cash, debt, or any other property 
to another person and the principal purpose of such transfer is--
            ``(1) to secure or increase an adjustment under subsection 
        (a), or
            ``(2) to increase (by reason of an adjustment under 
        subsection (a)) a deduction for depreciation, depletion, or 
        amortization,
the Secretary may disallow part or all of such adjustment or 
increase.''
    (b) Clerical Amendment.--The table of sections for part II of 
subchapter O of chapter 1 is amended by inserting after the item 
relating to section 1021 the following new item:

                              ``Sec. 1022. Indexing of certain assets 
                                        for purposes of determining 
                                        gain or loss.''
    (c) Effective Date.--The amendments made by this section shall 
apply to dispositions of property after the date of the enactment of 
this Act.

SEC. 2. EXCLUSION OF GAIN FROM SALE OF PRINCIPAL RESIDENCE.

    (a) In General.--Section 121 of the Internal Revenue Code of 1986 
(relating to one-time exclusion of gain from sale of principal 
residence by individual who has attained 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 which has been owned and used by the taxpayer 
as the taxpayer's principal 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 satisfying 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 section, if the taxpayer 
        holds stock as a tenant-stockholder (as defined in section 216) 
        in a cooperative housing corporation (as defined in such 
        section), then--
                    ``(A) the holding requirements of subsection (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 purposes 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 individual 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 separate 
                maintenance shall not be considered as married.
            ``(7) Application of sections 1033 and 1034.--In applying 
        sections 1033 (relating to involuntary conversions) and 1034 
        (relating to sale or exchange 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 involuntary 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 taxpayer 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 taxpayer who--
                    ``(A) becomes physically or mentally incapable 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 section 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 residence) 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 following: ``(relating to 
        exclusion of gain from sale of principal residence)''.
            (4) The table of sections for part III of subchapter B of 
        chapter 1 of such Code is amended by striking the item relating 
        to section 121 and inserting the following new item:

                              ``Sec. 121. Exclusion of gain from sale 
                                        of principal residence.''
    (c) Effective Date.--The amendments made by this section shall 
apply to sales and exchanges after the date of the enactment of this 
Act.
Output: Amends the Internal Revenue Code to require that an inflation indexed basis rather than an adjusted basis be used to determine gain or loss in the disposition of the following assets held at least one year: (1) corporate stock; (2) bonds; (3) tangible property used in, or land held in connection with, a business or trade; and (4) a principal residence. 
Replaces the existing one-time "55 years or older" exclusion of $125,000 of gain from the sale of a principal residence with an exclusion of $250,000 ($500,000 in the case of a joint return) from the sale of a principal residence (eliminating age and one-time provisions).