DEFINITION of 'Zero Capital Gains Rate'

The capital gains tax rate of 0% that is charged to individuals who sell property in an "enterprise zone". The zero capital gains rate can be applied by a given level of government in order to prompt investment in a given area.

BREAKING DOWN '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 the D.C. Enterprise Zone.

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 singles 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 the 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.

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 in 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).
  1. Tax Bracket

    A Tax Bracket is the rate at which an individual is taxed. Tax ...
  2. Marginal Tax Rate

    A marginal tax rate is the amount of tax paid on an additional ...
  3. Taxable Gain

    Taxable gain refers to any profit earned on a sale of an asset ...
  4. Property Tax

    Property tax is an ad valorem tax assessed on real estate by ...
  5. Property Tax Deduction

    Property tax deduction refers to state and local property taxes ...
  6. Income Approach

    An income approach is a real estate appraisal method that allows ...
Related Articles
  1. Taxes

    Comparing Long-Term vs. Short-Term Capital Gains Tax Rates

    A firm understanding of the difference between the taxation of long- and short-term capital gains is crucial to ensuring the benefits of your investment portfolio outweigh the costs.
  2. Taxes

    Getting U.S. Tax Deductions On Foreign Real Estate

    If your home or second home is not in the United States, you can still get U.S. tax deductions. How many and what kind depends on whether you also rent it.
  3. Taxes

    Sell Your Rental Property for a Profit

    Learn how to sell your rental property for a profit. Find out how to master the selling process.
  4. Investing

    Canada: A New Frontier For Real Estate Investors

    This property market is easy to access and provides profitable opportunities.
  5. Taxes

    Which Countries Have High Taxes on High Incomes?

    For high earners in these countries, the tax rate percentage on income exceeding a certain threshold can reach into the high 50s and low 60s.
  6. Investing

    Use Real Estate to Put Off Tax Bills

    Investing in real estate can help you build wealth and reduce your taxes. Here's what you need to know.
  7. Taxes

    The 7 Best States For Property Taxes, and Why

    Understand why some states have high property taxes while others have low property taxes. Learn about the states with the lowest property taxes.
  8. Taxes

    10 Things to Know About 1031 Exchanges

    Real estate swaps grow popular, but traps are many. Here's 10 things to know when considering 1031 swaps. Also: Beware new rules on vacation homes.
  9. Taxes

    Breaking Down Taxes For Different Income Brackets

    Here is a useful rundown of how much you will pay in taxes based on your income.
  10. Taxes

    Investment Tax Basics For All Investors

    Asset placement and tax-loss harvesting can reduce the tax burden, however, Investors should still consult tax advisors for investment strategies.
Trading Center