Zero Percent Capital Gains Rate

Target Audience

Incentive Not Relevant

Questions and Answers

Quick Overview

Tax Incentives

• Wage Tax Credit

• Commercial Revitalization Deduction

• Increased Section 179 Deductions

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If a business holds a Renewal Community Business asset acquired after December 31, 2001 and before January 1, 2010 for a minimum of 5 years, the business does not have to include any “qualified capital gain” from the asset’s sale or exchange in its gross income.  This exclusion applies only to an interest in, or property of, certain businesses operating in a Renewal Community (RC).  The following qualify as RC assets: RC business stock, RC partnership interests, RC business properties.  Only gain attributable to the period from January 1, 2002 through December 31, 2014 may be excluded for RCs.

Target Audience

• New business partnerships or corporations that issue new stock or ownership interests for entities with operations in the expanded RC.

• Existing businesses with operations in the expanded RC that issue new stock or acquire new ownership interests.

• Qualified business entities that purchase real estate in the expanded RC.

Incentive Not Related to

• Businesses that cannot meet the definition of a Renewal Community Business. Certain business activities do not qualify, such as residential rentals; commercial real estate, unless at least 50 percent of the gross rental income is from Renewal Community businesses; rental of personal property, such as car rental agencies, unless at least 50 percent of the rentals are to Renewal Community Businesses, or RC residents; businesses that predominantly hold or develop intangibles for sale or license; country clubs; liquor stores; golf courses; racetracks; or gambling facilities.

• Businesses that acquire stock or partnership interests issued before or after the RC designation period.

• Businesses that purchase existing assets (such as building) that will not be rehabilitated substantially within a 2-year period.

• Taxpayers who do not expect to hold stock, partnership interests, or assets for the minimum 5-year holding period.

• Taxpayers with capital gains on intangible assets or who own land that is not an integral part of an RC business.

Questions and Answers

Is there any special capital gain treatment for property in an RC?

The capital gain on certain assets is eligible for 0-percent capital gains rate in all RCs.

What assets are eligible for 0-percent capital gains in RCs?

The 0-percent capital gains rate applies to gain from the sale of an RC asset acquired after December 31, 2001 and before January 1, 2010.  Qualifying assets include (1) stock in a domestic company acquired by the taxpayer at its original issue from the corporation solely in exchange for cash, (2) any capital or profits interest in a domestic partnership if the interest was acquired by the taxpayer from the partnership solely in exchange for cash, and (3) tangible business property acquired by the taxpayer by purchase, in which either the original use of the property in RC commences with the taxpayer or the taxpayer substantially improves the property.  In the case of stock or partnership interests and ownership of the tangible business property, the business must be a Renewal Community Business when the stock, interest, or property is acquired (or be formed with the purpose of being a Renewal Community Business) and must remain a Renewal Community Business for substantially all of the holding period.

If the asset was purchased before an area receives an RC designation does the 0-percent capital gains rate apply?

No.  The asset must be purchased after designation.  If additional stock or partnership interests of an entity are purchased at original issuance after the RC designation, these additional interests might qualify.

What if a taxpayer purchased an RC asset, such as an existing building, from the taxpayer’s parents?

The 0-percent capital gains rate is not available for transactions between related parties.  “Related persons” include sons, daughters, parents, stepchildren, stepmothers, stepfathers, in-laws, and other persons treated as dependents under the tax code.  Similar restrictions apply to sales to majority shareholders or partners of the business.

What if a business ceases to meet definition of a Renewal Community Business?

The business must meet the requirements for substantially all of the 5-year holding period.  “Substantially all” generally means 85 percent of the period.  If the business ceases to meet the test after the 5-year holding period, the 0-percent rate applies, but only to the extent of the gain to the date the business failed to meet the requirements.

How long must the asset be held?

The minimum holding period is 5-years.

If the asset is sold before the end of the 5-year period, can the 0-percent gain feature be preserved for the subsequent holder?

A subsequent purchaser of an asset that otherwise qualifies for 0-percent capital gain treatment is eligible for the incentive.  The original purchaser would not be able to exclude any gain attributable to the period the asset was held, however, because the asset was not held by the original purchaser for the minimum period.

What if the asset is held beyond the RC designation period?

The 0-percent rate applies only to gain attributable to the period after December 31, 2001 and before January 1, 2015 in the case of an RC asset.  The taxpayer is not required to sell the asset in 2015 (for an RC asset), but must determine and substantiate the gain attributable to that period and may apply the 0-percent rate to the amount.

What if the stock or partnership interest in redeemed before the end of the minimum holding period?

The asset would not be eligible for the 0-percent capital gains rate.

Where can a business obtain more information on this incentive?

For specific information, contact your tax advisor, accountant, or attorney and/or see IRS Tax Form 4562.  For general information, contact Buck Trussell, Vice President, The Coordinating & Development Corporation, Division of Marketing and Industrial Development, Phone: (318) 632-2022, e-mail: btrussell@shreve.net