What is a Zero Capital Gains Rate?
A zero capital gains rate is a 0% tax on gains from the sale of assets and property sold in an enterprise zone.
How Does a Zero Capital Gains Rate Work?
For example, downtown ABCTown has decayed over the last 10 years. There are many vacant storefronts, a lot of drug activity, dead landscaping, pitted sidewalks and abandoned houses.
The state wants people to gentrify the area so that businesses open, jobs come to the area, people invest in the area, and the resulting higher property taxes will fund improvements such as roadwork and new landscaping. This, the state believes, will turn downtown ABCTown around. So, it creates an enterprise zone in which all gains on property sales are taxed at 0%.
John and Jane Doe hear about this and start looking at houses. They form an LLC and buy a house in the enterprise zone for $55,000. They put $15,000 into improving the property. Soon they have a nice house worth $95,000 that they can rent to a college student for $450 a month. They do this for a few years, and over that time more small businesses purchase and fix up homes in the area. This increases the value of the Doe home more -- to $100,000. After five years, John and Jane decide to sell the house and travel around the world. Through their business, they sell the house for a $45,000 profit and don't pay capital gains on the sale to the state, saving them, say, $3,000.
Why Does a Zero Capital Gains Rate Matter?
Governments implement zero capital gains rates when they want to encourage investments in certain areas. The D.C. Enterprise Zone is one example. The idea isn't just to make an ugly neighborhood pretty again; when portions of a city are revitalized, the value of the properties in the area increases, which generates more property tax revenue later for the municipality. Thus, from a government perspective, the idea is to forgo a little tax revenue now in order to gain a lot of tax revenue later.