The federal income tax tables do not accurately reflect your valid tax rates.

For Example, The NIIT is a 3.8% tax on net investment income.

You’re one of NIIT’s prime targets if you own rental property.

You only pay the NIIT if:

  • Your modified adjusted gross income (MAGI) exceeds $200,000 if you’re single, or $250,000 if you’re married filing jointly ($125,000 for married couples filing separately), and
  • You have net investment income.

Your MAGI for NIIT purposes is the same as your adjusted gross income (AGI), which equals your gross income less above-the-line deductions. The tax code modifies the NIIT AGI only for certain U.S. citizens or residents who live abroad.

You pay the 3.8% NIIT on the lesser of:

  • Your net investment income, or
  • The amount your MAGI exceeds the applicable $200,000/$250,000 threshold.

NIIT Exemption #1: Real Estate Professionals:

For the NIIT, the tax code defines the real estate professional, and you may qualify.

The tax-law-defined real estate professionals earn supreme status when it comes to rental property because they:

  • Deduct their losses from non-rental income, and
  • Most likely qualify to have their profits escape the NIIT.

If you achieve tax-law-defined real estate professional status, you can deduct your losses and profits from the NIIT.

Real Estate Professional Status:

To qualify as a real estate professional, you or your spouse (if you file jointly) must spend (1) over 50 percent of your work time in a real estate business or business and (2) over 750 hours working in real estate businesses during the year.

Material Participation in Rental Activity

In addition, you must materially participate in your rental activity to deduct your losses or qualify for the exemption. There are seven ways to establish material participation. The two most common are:

  • Doing all the work on the rental, or
  • Working more than 100 hours on the rental is more than any other individual works on the rental.

Rental Activity as a Business:

Rental activities must be defined as businesses to qualify for tax purposes.

NIIT Exemption #2: Short-Term Rentals

A short-term rental is exempt from the tax-law-defined real estate professional rules if the average tenant stay is seven days or less or if it is not more than 30 days. To deduct your losses on a short-term rental, you need to participate in the property materially.

You are subject to the NIIT on your short-term rental if (1) you materially participate and (2) the rental is a tax-code-defined business.

NIIT Exemption #3: Self-Rentals

Income earned from renting a property to a business in which you materially participate is not considered net investment income.

Please Schedule Your Free Tax Assessment Here if you want to discuss how your rentals interact with the NIIT.