The Honorable Barbara A. Mikulski
United States Senate
Washington, DC 20510


January 9, 1997 


Dear Senator Mikulski:


As you requested during our meeting in July 1996, we have developed the enclosed tax proposals dealing with various complexities and inequities in the present law concerning taxpayers selling their residences. These proposals are intended to address various residence sale tax issues, including: elderly individuals selling their residences and entering continuing care retirement communities (CCRCs), individuals with various marital situations, individuals with inflation-based (non-economic) gains, individuals with losses, and individuals in different geographic areas. The tax law should be changed to reduce these complexities and inequities.


The AICPA supports President Clinton’s residence sale exclusion proposal with a few modifications. We suggest a $500,000 exclusion applying per house. This would focus on the more appropriate issue - the residence, and not on the marital status of the taxpayer. Further, the exclusion proposal should apply if the residence is the principal residence of either spouse at the time of a divorce or legal separation or if the residence is sold pursuant to a divorce decree or legal separation. The $500,000 exclusion proposal, particularly with these modifications, would be a simple and broad solution to the many home sale tax problems in the present law that you are seeking to correct. If this broad proposal for home sale gain exclusion does not become politically feasible or is side-tracked in Congress, you may want to consider the alternative proposals that we have developed and enclosed.


Specifically, we have developed nine proposals. We recommend as core proposals, numbers 1, 8, and 9. If, however, it is not possible to enact proposal 1, we recommend proposals 2-7 as an alternative to proposal 1. While not as broad a change as proposal 1, alternative proposals 2-7 would address a number of problems in present law. Our proposals are:


1. As described above, allow taxpayers to exclude up to $500,000 in capital gains from the sale of a "qualified residence" (the principal residence of either spouse at the time of divorce or legal separation will be a "qualified residence"), available once every two years, and repeal the present law IRC section 121 $125,000 one-time age 55 exclusion and the IRC section 1034 two year rollover/purchase rule.


2. Provide an additional age and exclusion amount threshold to the section 121 one-time exclusion. If the age 55 exclusion is not used by the taxpayer, then at age 65, the exclusion amount would be $200,000. Also, the exclusion amounts for both 55 and 65 would be indexed.


3. Eliminate the taint of losing the IRC section 121 age 55 home sale gain exclusion when one spouse, who has never used the exclusion, marries someone who has previously used the exclusion.


4. Allow IRC section 1034 rollover treatment (and related tax treatment - i.e., home mortgage interest expense deduction) to taxpayers if the residence is the principal residence of either spouse at the time of divorce or legal separation.


5. Include deposits to CCRCs, as described in IRC section 7872, as proceeds reinvested in a new residence (i.e., a qualified rollover) for purposes of sale of personal residence gain deferral under IRC section 1034 and other related sections.


6. Expand the measurement period for the IRC section 121 election requirement from three out of five years to three out of six years to help divorced individuals.


7. Allow capital losses on the sale of principal residences to be deducted (up to normal capital loss limits) and the excess carried forward.


8. Send to Treasury/IRS a letter requesting that part of the periodic payments to CCRCs qualifies for the medical expense itemized deduction as amounts paid for long-term care services to a qualified provider.


9. Send to Treasury/IRS a letter requesting that regulatory proposals concerning homes be considered.


We look forward to discussing these proposals in more detail with you, and we would be happy to answer any questions you may have on this or other tax matters. Feel free to contact any of the following: me at (757) 873-1587; Ward Bukofsky, Chair of the Individual Taxation Committee, at (310) 278-5850; Daryl Jackson, Chair of the Residence Sale Working Group, at (703) 307-3562; or Eileen Sherr, Technical Manager, at (202) 434-9256.




Michael E. Mares
Tax Executive Committee