The Net Investment Income Tax (NIIT) is a tax imposed on individuals, estates, and trusts that have certain investment income above specified threshold amounts. Introduced as part of the Health Care and Education Reconciliation Act of 2010 to help fund the Affordable Care Act, the NIIT is a 3.8% tax on the lesser of:
- Your net investment income, or
- The amount by which your modified adjusted gross income exceeds the statutory threshold amount based on your filing status.
The NIIT can affect individuals who have income from rental properties, capital gains from the sale of real estate investments, and other investment income related to real estate. It’s important to note that the tax is not imposed on the gross rental income or the total sales proceeds from real estate transactions, but rather on the net investment income, which is the gross income less allowable deductions related to the production of that income (e.g., property management fees, mortgage interest, property taxes, depreciation, and maintenance expenses).
Real estate professionals, who actively participate in real estate businesses and meet certain criteria (such as material participation and number of hours spent on real estate activities), may be exempt from NIIT on their rental income due to provisions that classify this income as non-passive. However, capital gains from the sale of real estate investments could still be subject to the NIIT.
Investors in real estate should consult with tax professionals to understand how the NIIT applies to their specific situations, as tax laws are complex and subject to change. It’s also crucial to consider the NIIT in tax planning and investment strategies within the real estate industry.