What Is a Zero Capital Gains Rate?
Let me explain what a zero capital gains rate really means—it's a tax rate of 0% on capital gains, which you might encounter if you're selling property in what's called an enterprise zone. These zones are specific geographic areas where the government offers special tax breaks, regulatory exemptions, or other assistance to boost private economic development and create jobs. They're typically aimed at revitalizing city neighborhoods that need a push.
Governments at various levels apply this zero rate to encourage investment in targeted areas. If you're considering property in such a zone, this could be a key incentive for you.
Key Takeaways
- A zero capital gains rate means no taxation on the sales of assets or property that would normally incur a capital gain.
- This 0% rate is most commonly linked to enterprise zones, which governments designate to foster development and economic growth.
- To maintain this zero rate, you as a property owner must satisfy certain qualifications and requirements, which can differ across enterprise zones.
Understanding a Zero Capital Gains Rate
Back in 2004, the U.S. Congress passed and the president signed the Working Families Tax Relief Act, which included provisions extending the 0% capital gains tax to properties sold in certain enterprise zones. These zones started in the U.S. in the 1970s to counter the exodus of people and businesses from urban centers to suburbs. The idea is to motivate private companies to stay, expand, or move into these areas.
The reasoning here is straightforward: it provides an incentive for you to invest in these zones. This rate isn't limited to any single region, state, or city—legislators often use it or similar tax incentives to generate jobs and attract investment to communities.
In 2012, a tax bill made the 0% capital gains rate permanent for most filers, as long as singles have taxable income under $37,950 or couples under $75,900. However, if you earn additional income taxed at ordinary rates, it might push your long-term gains or qualified dividends from the 0% bracket into the 15% one, leading to rates of 25% to 30% in some cases.
On the flip side, itemized deductions can lower your ordinary income, potentially keeping you below the 15% bracket and allowing more of your capital gains or dividends to be taxed at 0%. This is why some taxpayers with high adjusted gross incomes still end up with 0% taxes on long-term capital gains.
Example: The D.C. Enterprise Zone
Each enterprise zone operates under its own rules, which can evolve as legislation changes. Take the D.C. enterprise zone as an example—here are the mandates you need to meet:
D.C. Enterprise Zone Requirements
- The property must have been substantially improved during your ownership period.
- You must have held the property for at least five years from the acquisition date.
- At least 80% of the total gross income from the property must come from business conducted within the D.C. Enterprise Zone.
- If it's for commercial rental, at least 50% of the rental income must derive from businesses located in the zone.
- The original use of the property must start with you as the taxpayer, but this is satisfied if you've made substantial improvements.
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