SECTION 121. 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 aggregating 2 years or more.

(b) LIMITATIONS

(1) IN GENERAL

The amount of gain excluded from gross income under subsection (a) with respect to any sale or exchange shall not exceed $250,000.

(2) SPECIAL RULES FOR JOINT RETURNS

In the case of a husband and wife who make a joint return for the taxable year of the sale or exchange of the property--

(A) $500,000 Limitation for certain joint returns--

Paragraph (1) shall be applied by substituting `$500,000' for `$250,000' if--

(I) either spouse meets the ownership requirements of subsection (a) with respect to
such property,

(ii) both spouses meet the use requirements of subsection (a) with respect to such
property, and

(iii) neither spouse is ineligible for the benefits of subsection (a) with respect to such
property by reason of paragraph (3).

(B) Other joint returns--

If such spouses do not meet the requirements of subparagraph (A), the limitation under
paragraph (1) shall be the sum of the limitations under paragraph (1) to which each spouse
would be entitled if such spouses had not been married. For purposes of the preceding
sentence, each spouse shall be treated as owning the property during the period that either
spouse owned the property.

(3) APPLICATION TO ONLY 1 SALE OR EXCHANGE EVERY 2 YEARS

(A) IN GENERAL

Subsection (a) shall not apply to any sale or exchange by the taxpayer 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 exchange to which this subsection applies,
the ownership and use requirements of subsection (a), and subsection
(b)(3), shall not apply; but the dollar limitation under paragraph (1)
or (2) of subsection (b), whichever is applicable, shall be equal to--

(A) the amount which bears the same ratio to such limitation
(determined without regard to this paragraph) as

(B)(I) 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 exchange, bears to

(ii) 2 years.

(2) SALES AND EXCHANGES TO WHICH SUBSECTION APPLIES

This subsection shall apply to any sale or exchange if--

(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 © 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 unmarried individual owned and used such
property shall include the period such deceased spouse owned and used
such property before death.

(3) PROPERTY OWNED BY SPOUSE OR FORMER SPOUSE

For purposes of this section--

(A) PROPERTY TRANSFERRED TO INDIVIDUAL FROM SPOUSE OR FORMER
SPOUSE

In the case of an individual holding property transferred to such
individual in a transaction described in section 1041(a), 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 individual'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 (as defined in section
71(b)(2)).

(4) 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.

(5) INVOLUNTARY CONVERSIONS-

(A) IN GENERAL

For purposes of this section, the destruction, theft, seizure,
requisition, or condemnation of property shall be treated as the
sale of such property.

(B) APPLICATION OF SECTION 1033

In applying section 1033 (relating to involuntary conversions),
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 this section.

(C) PROPERTY ACQUIRED AFTER INVOLUNTARY CONVERSION

If the basis of the property sold or exchanged is determined (in
whole or in part) under section 1033(b) (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.

(6) RECOGNITION OF GAIN ATTRIBUTABLE TO DEPRECIATION

Subsection (a) shall not apply to so much of the gain from the sale of
any property as does not exceed the portion of the depreciation
adjustments (as defined in section 1250(b)(3)) attributable to periods
after May 6, 1997, in respect of such property.

(7) 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 uses such property as the taxpayer's
principal residence during the 5-year period described in
subsection (a) for periods 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 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.

(8) 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 principal
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 separately.

(B) EXCEPTION FOR SALES TO RELATED PARTIES

Subparagraph (A) shall not apply to any sale to, or exchange
with, any person who bears a relationship to the taxpayer which
is described in section 267(b) or 707(b).

(e) DENIAL OF EXCLUSION FOR EXPATRIATES

This section shall not apply to any sale or exchange by an individual if
the treatment provided by section 877(a)(1) applies 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 section 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 resulted under section 1034 (as in effect on the day
before the date of the enactment of this section) in the nonrecognition of
any part of the gain realized on the sale or exchange of another residence,
in determining the period 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 under section 1223(7) in determining the holding period
of such property) had been so owned and used.

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