Exclusion of Capital Gains From DC Zone Assets

If you hold a District of Columbia Enterprise Zone (DC Zone) asset more than 5 years, you will not have to include any "qualified capital gain" from its sale or exchange in your gross income. This exclusion applies to an interest in, or property of, certain businesses operating in the District of Columbia.

DC Zone Asset

A DC Zone asset is any of the following.

• DC Zone business stock.
• DC Zone partnership interest.
• DC Zone business property.

In determining whether any property is a DC Zone asset, continue to treat the DC Zone as an empowerment zone for years after 2003.

DC Zone business stock. DC Zone business stock is any stock in a U.S. corporation that is originally issued after 1997, if all the following requirements are met.

1. You acquired the stock before January 1, 2004, at its original issue solely in exchange for cash. (This requirement is also met if you acquired the stock before, on, or after January 1, 2004, from another person in whose hands it was DC Zone business stock.)
2. The corporation was a DC Zone business (or was being organized as a DC Zone business) at the time the stock was issued.
3. The corporation qualified as a DC Zone business during substantially all of your holding period for the stock. (This requirement is also met if the corporation ceased to qualify as a DC Zone business after the 5-year period beginning on the date you acquired the stock. However, your qualified capital gain cannot be more than what it would have been if you had sold the stock on the date the corporation ceased to qualify.)

Redemptions of business stock. Stock will not qualify as DC Zone business stock if the issuing corporation makes certain redemptions of its stock within 2 years before or 2 years after the date the stock was issued. For details, see sections 1400B(b)(2)(B) and 1202(c)(3) of the Internal Revenue Code.

DC Zone partnership interest. A DC Zone partnership interest is any capital or profits interest in a U.S. partnership that is originally issued after 1997, if all the following requirements are met.

1. You acquired the partnership interest from the partnership before January 1, 2004, in exchange for cash. (This requirement is also met if you acquired the partnership interest before, on, or after January 1, 2004, from another person in whose hands it was a DC Zone partnership interest.)
2. The partnership was a DC Zone business (or was being organized as a DC Zone business) at the time the partnership interest was acquired.
3. The partnership qualified as a DC Zone business during substantially all of your holding period for the partnership interest. (This requirement is also met if the partnership ceased to qualify as a DC Zone business after the 5-year period beginning on the date you acquired the partnership interest. However, your qualified capital gain cannot be more than what it would have been if you had sold the partnership interest on the date the partnership ceased to qualify.)

Redemptions of partnership interest. A partnership interest will not qualify as a DC Zone partnership interest if the partnership makes certain acquisitions of its partnership interests within 2 years before or 2 years after the date the partnership interest was issued. For details, see sections 1400B(b)(3), 1400B(b)(2)(B), and 1202(c)(3) of the Internal Revenue Code.

DC Zone business property. DC Zone business property is tangible property acquired after 1997 that meets all the following requirements.

1. You acquired the property before January 1, 2004. (This requirement is also met if you acquired the property before, on, or after January 1, 2004, from another person in whose hands it was DC Zone business property.)
2. You did not acquire the property from a related person or member of a controlled group of which you are a member.
3. Your basis in the property is not determined either by its adjusted basis in the hands of the person from whom you acquired it or under the stepped-up basis rules for property acquired from a decedent.
4. You were the first person to use the property in the DC Zone. (This requirement is also met if you acquired the property from another person in whose hands it was DC Zone business property.)
5. Substantially all of the use of the property was in your DC Zone business during substantially all of your holding period for that property. (This requirement is also met if you stopped using the property in your DC Zone business, or your business ceased to qualify as a DC Zone business, after the 5-year period beginning on the date you acquired the property. However, your qualified capital gain cannot be more than what it would have been if you had sold the property on the date you stopped using the property in your DC Zone business or on the date your business ceased to qualify.)

Special rule for substantially improved buildings. Buildings (and land on which they are located) will be treated as having met requirements (1) and (4) if you substantially improve the buildings before January 1, 2004. You substantially improve a building if, during any 24-month period beginning after 1997, your additions to the basis of the property are more than the greater of the following amounts.

1. 100% of the adjusted basis of the property at the beginning of the 24-month period.
2. $5,000.

DC Zone business. A DC Zone business for this capital gains exclusion is an enterprise zone business as defined earlier under Increased Section 179 Deduction in the discussion of empowerment zones, with the following exceptions.

• The 35% employee residence requirement listed in item (6) does not apply.
• The 50% of gross income requirement listed in item (2) is increased to 80%.
• No area other than the DC Zone can be treated as an empowerment zone or enterprise community.

For this purpose, the DC Zone is treated as including all census tracts in the District of Columbia with a poverty rate of 10% or more as determined by the 1990 census.

Qualified Capital Gain

Qualified capital gain is any gain recognized on the sale or exchange of a DC Zone asset that is a capital asset or property used in a trade or business as defined in section 1231(b) of the Internal Revenue Code (generally real property or depreciable personal property). But it does not include any of the following gains.

• Gain attributable to periods before 1998 or after December 31, 2008.
• Section 1245 gain. See chapter 3 in Publication 544, Sales and Other Dispositions of Assets.
• Section 1250 gain figured as if section 1250 applied to all depreciation rather than the additional depreciation. See chapter 3 in Publication 544.
• Gain attributable to real property or an intangible asset that is not an integral part of a DC Zone business.
• Gain attributable, directly or indirectly, in whole or in part, to a transaction with a related person. For the definition of a related person, see chapter 2 in Publication 544.

Other rules. Rules similar to certain rules in section 1202 of the Internal Revenue Code apply to interests in pass-through entities, certain tax-free transfers, contributions to capital after the original stock issuance date, and short positions.

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