Zero Capital Gains Rate: Definition, Benefits & Drawbacks

KEY TAKEAWAYS

• A zero capital gains rate is when assets or property are sold that would otherwise result in a capital gain, there is no tax due.
• Enterprise zones—special places given special status by a government to promote development and economic growth—are commonly related to a 0 percent charge on the sale of a property.
• Property owners must fulfill a number of qualifications and requirements, which may fluctuate between different economic zones, in order to maintain a zero capital gains rate.
• The capital gains tax rate is 0% for married filing jointly or qualifying surviving spouse with taxable income up to $83,350, head of household with taxable income up to $55,800, and single tax filers with taxable incomes up to $41,675.

What Is Zero Capital Gains Rate?

A zero capital gains rate means that there is a capital gains tax rate of 0%. People selling real estate inside an “enterprise zone” may be subject to this 0% rate. An enterprise zone is a region that receives unique tax incentives, regulatory exemptions, or other forms of government support in order to promote private economic growth and job creation. They are most frequently employed to encourage the neighborhood redevelopment of cities as well as investment.

How Does a Zero Capital Gain Rate Work?

If your taxable income is less than or equal to $41,675 for single and married filing separately, $83,350 for married filing jointly or qualifying surviving spouse or $55,800 for head of household, the capital gains tax rate is zero percent.

There may be certain years when your taxable income is lower than in others. Choosing which retirement funds to draw from each year can help you create low-tax years on purpose.

Only long-term capital gains on assets you’ve owned for longer than a year are subject to 0% capital gains rates. Your capital gains are generally taxed at your income tax rate if you hold assets for less than a year.

How to Use Capital Gains

There are a number of different ways that you can use the zero capital gains rate. Here are a couple of the more common ones:

Through Mutual Funds

Capital gains are distributed by mutual funds at the conclusion of each year. If you own tax-managed funds or index funds, the gains will probably be small, but funds that aren’t managed with taxes in mind can produce large returns. Before you purposefully realize more gains, you need to ascertain what this gain will be.

Through Capital Tax Loss

If you have a capital loss from a prior year that is being carried forward, check your tax return. Losses from previous tax years may continue indefinitely. If you have no profits, you can use up to $3,000 of a capital loss to offset ordinary income after first using it to offset gains. If you have capital losses that are being carried forward and you achieve profits, your gains will first offset all of your prior losses.

What States Have Zero Capital Gains?

The states that don’t impose an additional state capital gains tax are as follows: 

• Alaska
• Florida
• New Hampshire
• Nevada
• South Dakota
• Tennessee, Texas
• Washington
• Wyoming

What Are the Benefits of Zero Capital Gains?

Having a rate of zero percent on capital gains has a number of advantages. 

Low capital gains taxes, according to their supporters, are a fantastic incentive to save money and invest it in stocks and bonds. This increasing investment drives the economy’s expansion. Businesses have the resources to grow and develop, adding to the number of jobs.

They also mention that investors are purchasing those assets with their post-tax income. Their investment in stocks or bonds has already been subject to ordinary income tax; therefore, adding a capital gains tax would be considered double taxation.

What Are the Drawbacks of Zero Capital Gains?

The fairness of taxing passive income at a lower rate than earned income is questioned by opponents of low capital gains rates. The tax burden is shifted to working people as a result of low stock gain taxes.

Additionally, they contend that the tax sheltering business gets the most from a lower capital gains tax. In other words, firms invest their cash in low-tax assets rather than using it to develop.

Summary

Having a zero capital gains rate can have a number of advantages for both individuals as well as communities. Especially when this is applied to property and is used as an incentive to invest in an area. 

While not all people will be able to claim a zero capital gains rate, there are a number of different, legal ways to minimize your capital gains taxes. This includes holding onto your investments for over a year, deducting capital losses from your capital gains, and carrying remaining capital losses forward.

If you want more information on your own personal situation, then it is advisable to speak with a financial advisor regarding your investment income tax and additional gains.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.

Written by Jami Gong, MPAcc, CPA

Jami Gong is a Chartered Professional Account and Financial System Consultant. She holds a Masters Degree in Professional Accounting from the University of New South Wales. Her areas of expertise include accounting system and enterprise resource planning implementations, as well as accounting business process improvement and workflow design. Jami has collaborated with clients large and small in the technology, financial, and post-secondary fields.