Losses from the sale of principal residences

(a) Allowance of loss (1) In general Section 165(c) of the Internal Revenue Code of 1986 is amended by striking and at the end of paragraph (2), by striking the period at the end of paragraph (3) and inserting; and, and by adding at the end the following new paragraph: (4) any— (A) qualified principal residence loss, and (B) any qualified principal residence loss carryforward (as determined under section 1212(b)(3)).. (2) Definitions and limitations Section 165 of such Code is amended by redesignating subsection (m) as subsection (n) and by inserting after subsection (l) the following new subsection: (m) Rules related to qualified principal residence losses (1) Qualified principal residence loss For purposes of subsection (c)(4)— (A) In general The term qualified principal residence loss means any loss from the sale or exchange of a residence of the taxpayer located in the United States if, during the 5-year period ending on the date such residence is sold or exchanged, such property has been owned and used by the taxpayer as the taxpayer's principal residence (within the meaning of section 121) for periods aggregating 2 years or more. (B) Application to only 1 sale or exchange every 2 years Rules similar to the rules of section 121(b)(3) shall apply for purposes of this paragraph. (C) Exclusion of loss allocated to nonqualified use (i) In general Paragraph (1) shall not apply to so much of the loss from the sale or exchange of property as is allocated to periods of nonqualified use (as defined in section 121(b)(5)(C)). (ii) Allocation rules For purposes of this clause, loss shall be attributable to periods of nonqualified use under the principles of section 121(b)(5)(B). (D) Taxpayers failing to meet certain requirements Rules similar to the rules of section 121(c) shall apply for purposes of this paragraph (determined by substituting section 165(m)(2) for paragraph (1) or (2) of subsection (b), whichever is applicable in paragraph (1) thereof). (E) Special rules (i) In general Rules similar to the rules of paragraphs (1), (2), (3), (4), (5) (applied without regard to the phrase destruction, theft in subparagraph (A) thereof), (7), (8), (9), (10), and (12) of section 121(d) shall apply for purposes of this paragraph. (F) Expatriates Rules similar to the rules of subsection (e) of section 121 shall apply for purposes of this paragraph. (2) Dollar limitation The amount of any qualified principal residence loss shall not exceed $100,000 ($50,000 in the case of a married individual filing a separate return). (3) Income limitation (A) In general The amount of qualified principal residence loss (determined after application of paragraph (2) and without regard to this paragraph) shall be reduced (but not below zero) by the amount which bears the same ratio to such loss (as so determined) as— (i) the excess of— (I) the taxpayer's modified adjusted gross income for such taxable year, over (II) $200,000 (50 percent of such amount in the case of a married individual filing a separate return), bears to (ii) $50,000 (50 percent of such amount in the case of a married individual filing a separate return). (B) Modified adjusted gross income For purposes of this paragraph, the term modified adjusted gross income means the adjusted gross income of the taxpayer for the taxable year determined without regard to subsection (c)(4) and increased by any amount excluded from gross income under section 911, 931, or 933.. (3) Coordination with exclusion for gain (A) In general Section 121(b)(3) of such Code is amended by inserting or section 165(c)(4) after subsection (a). (B) Conforming amendment Section 121(c)(1)(B)(i)(II) of such Code is amended by inserting or section 165(c)(4) after subsection (a). (4) Application of rules limiting losses (A) In general Section 1211 of such Code is amended by adding at the end the following new subsection: (c) Special rules for taxpayers with qualified principal residence loss (1) In general In the case of a taxpayer (other than a corporation) which has a qualified principal residence loss for any taxable year— (A) this subsection shall be applied before subsection (b), and (B) such loss shall be allowed only to the extent of the sum of— (i) gains from sales or exchanges of capital assets during such taxable year, plus (ii) if such loss exceeds such gains, the amount of such excess. (2) Coordination with subsection (b) In applying subsection (b) to any taxable year to which this subsection applies— (A) qualified principal residence losses shall not be taken into account, and (B) gains from sales or exchanges of capital assets during such taxable year taken into account under such subsection shall be reduced by the amount of such gains taken into account under paragraph (1)(B)(i). (3) Qualified principal residence loss For purposes of this paragraph, the term qualified principal residence loss means, with respect to any taxable year, any loss allowed for such taxable year by reason of section 165(c)(4) (including any qualified principal residence loss carryforward taken into account for such taxable year under subparagraph (B) thereof).. (B) Carryforwards Section 1212(b) of such Code is amended is amended by adding at the end the following new paragraph: (3) Special rule for qualified principal residence losses (A) In general For purposes of section 165(c)(4)(B), the amount of qualified principal residence loss carryforward determined under this paragraph is the excess (if any) of— (i) the excess determined under section 1211(c)(1)(B)(ii) for the taxable year, over (ii) taxable income (computed without regard to any loss allowed with respect to such excess or any amount or deduction described in paragraph (2)(B)). (B) Coordination with other capital losses For purposes of this subsection— (i) a qualified principal residence loss (as defined in section 1211(c)(3)) shall not be taken into account for purposes of paragraph (1) or (2), and (ii) taxable income for purposes of paragraph (2)(B) shall be computed after the allowance for any qualified personal residence loss (as so defined).. (b) Effective date The amendments made by this section shall apply to sales in taxable years beginning after the date of the enactment of this Act.