On October 4, 2004, the President signed into law the Working Families Tax Relief Act of 2004. This new law contains provisions extending the zero percent capital gains tax rate that applies when certain qualifying property located in a D.C. Enterprise Zone is sold. The qualifying capital gains are "taxed" at a zero percent capital gains rate. This opportunity to sell appreciated property while not paying Federal or D.C. taxes on the qualifying capital gains is an opportunity for all clients who have invested, or are interested in investments, in the District of Columbia. Generally, this applies to stock ownership of D.C. corporations, partnership interests in D.C. partnerships, and real estate located within the District (hereinafter collectively "Property").

Essentially, after the newly enacted extensions, the zero percent capital gains tax rate applies to the following transactions:

  • Property purchased after December 31, 1997 and before January 1, 2006, or that has been "substantially improved" during that time period

  • Property that is located within a D.C. Enterprise Zone

  • Property that has been held for five years from the date of acquisition

  • Property that is owned or issued by an entity that qualifies as a D.C. Zone Business:

    • At least 80% of the total gross income is derived from the active conduct of business in the D.C. Enterprise Zone

    • A substantial portion of the entity’s tangible property is located in the D.C. Enterprise Zone

    • A substantial portion of the services provided must be performed within the D.C. Enterprise Zone

  • If commercial rental property, at least 50% of rental income is from DC Zone Businesses

    • Lessor can use certification of lessee that it is a D.C. Zone Business as prima facie evidence, or

    • Lessee should conduct D.C. business from a separate legal entity to avoid aggregation of related businesses in geographic areas outside 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)

    • If stock interest, then corporation was D.C. Zone Business when stock was issued

    • If partnership interest, then partnership was a D.C. Zone Business when partnership interest was acquired

  • During substantially all of the taxpayer’s holding period, the business entity or use of the property qualified as a D.C. Zone Business

  • The zero percent capital gain rate applies only to qualified capital gain attributable to periods from January 1, 1998 through December 31, 2010.

Qualified capital gain does not include amounts that would be recharacterized as ordinary income, but for the property’s location in a D.C. Enterprise Zone. For example, any amounts that should be treated as ordinary income due to the depreciation recapture rules are still subject to the ordinary income tax rates.

This is necessarily a very simplified listing of the requirements of the Internal Revenue Code, section 1400B. There are several exceptions and a safe harbor that might apply in any given factual scenario. However, the above check-list is an initial screening guide to determine whether an entity might qualify for the favored tax treatment.

The legislative history indicates that Congress wants to attract developers to the District of Columbia. Therefore, developers need to be aware of these provisions and take advantage of the favorable tax treatment. Please let us know if you have any questions. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.