What Is a Zero Capital Gains Rate?

A zero capital gains rate implies a tax rate of 0% on capital gains. This 0% rate may be charged to individuals who sell property within a so-called "enterprise zone." Such a zone is a geographic area that has been granted special tax breaks, regulatory exemptions, or other public assistance in order to encourage private economic development and job creation. They are used most often to promote the revitalization of a city neighborhood.

The zero capital gains rate can be applied by a given level of government in order to prompt investment in a given area.

Key Takeaways

  • A zero capital gains rate incurs no taxation on the sales of assets or property that would otherwise have a capital gain.
  • A 0% rate on the sale of property is most often associated with enterprise zones, which are special areas granted special status by a government in order to encourage development and economic growth.
  • In order to keep a zero capital gains rate, property owners must meet certain qualifications and requirements, which may vary among different enterprise zones.

Understanding a Zero Capital Gains Rate

In 2004, the U.S. Congress passed, and the president approved, the Working Families Tax Relief Act. The act contains provisions that extend the 0% capital gains tax to certain properties being sold within certain enterprise zones. Enterprise zones were introduced in the U.S. in the 1970s in an effort to reverse the flight of people and businesses from urban centers to the suburbs. The programs may be used to encourage a private company to stay in a neighborhood, expand in it, or relocate to it.

The logic behind this act is to give an incentive to individuals to invest in this area. The rate is not exclusive to any one region, state, or municipality. Legislators looking to create jobs and draw investment into a community frequently enact a zero capital gains tax rate, and/or institute other tax-related incentives in that area.

A 2012 tax bill made the 0% capital gains rate permanent for most filers, provided that are either single with a taxable income under $37,950, or couples with taxable income under $75,900. Even still, some of these filers face modest tax rates of 25% to 30%, if they earn additional income that’s taxed at ordinary rates, consequently pushing their long-term gains or qualified dividend income from the 0% bracket into the 15% bracket for investment income. On the other hand, itemized deductions may reduce ordinary income under, placing individuals beneath the 15% bracket, therefore increasing the capital gains or dividends that are taxed at 0%, which explains why taxpayers can have high Adjusted Gross Incomes but still face 0% taxes on their long-term capital gains.

Example: The D.C. Enterprise Zone

Under this program, each enterprise zone has its own particular set of rules, which may change as the legislation is extended or amended. For example, with the D.C. enterprise zone, the following mandates must be satisfied:

  • The property must have been substantially improved during that time period of ownership.
  • The property must be been for a minimum of five years from the date of acquisition
  • At least 80% of the total gross income resulting from the property ownership must be derived from business actively conducted within the D.C. Enterprise Zone.
  • If the property in question is for commercial rental purposes, at least 50% of the rental income must come from businesses located within the D.C. enterprise zone.
  • Original use of Property commences with the taxpayer (this requirement is deemed to be met if substantial improvements have been made to property).