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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 /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.
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).