Final answer:
Section 121 of the Taxpayer Relief Act of 1997 allows individuals to exclude up to $250,000 of capital gains from the sale of their primary home from taxable income, a significant provision for homeowners. It connects to the broader context of tax reform, including the Tax Reform Act of 1986, which simplified the tax code and modified tax rates.
Step-by-step explanation:
Section 121 of the Taxpayer Relief Act of 1997 includes specific provisions that relate to the exclusion of gain from the sale of a principal residence. This law allows individuals to exclude up to $250,000 of capital gains from the sale of their primary home ($500,000 for married couples filing jointly) from their taxable income, given they have owned and used the home as their main residence for at least two out of the five years prior to the sale. This was a significant change, as previously homeowners could only defer the capital gains tax if they purchased a new home of equal or greater value.
The Taxpayer Relief Act of 1997 followed earlier reforms, such as the Tax Reform Act of 1986, which aimed to simplify the tax code and eliminated tax shelters commonly used to reduce tax liability. The Tax Reform Act of 1986 itself was a sweeping tax law that lowered the highest tax bracket and increased the minimum rate, while eliminating many tax brackets and shelters to promote a more equitable tax system.