Zero Percent Capital Gains Rate for RC Assets

Is there any special capital gain treatment for property in a 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 an 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 or DC Enterprise Zone 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. (See appendix A.)

If the asset was purchased before an area receives a 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 a RC asset, such as an existing building, from the taxpayer's parents?
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.

What if a business ceases to meet the definition of a Renewal Community Business?
Qualified wages are generally wages subject to the Federal Unemployment Tax Act (FUTA). The credit is calculated against a maximum of $10,000 for the RC Wage Credit. A business may pay the employee more than $10,000 for RCs, but the maximum for purposes of calculating the credit is $10,000 for an RC. The instructions for IRS Form 8844 provide additional information on qualified wages.

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 that 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 in 2015, but must determine and substantiate the gain attributable to that period and may apply the 0-percent rate to that amount.

What if the stock or partnership interest is redeemed before the end of the minimum holding period?
The asset would not be eligible for the 0-percent capital gains rate, must be held for 5 years.