Net rental income is subject to net investment income tax, or NIIT, but only on a portion of your modified adjusted gross income above certain thresholds. Additionally, gain from the sale of rental property may also be subject to NIIT unless the rental activity is part of an active trade or business.
Created as part of the Health Care and Education Reconciliation Act of 2010, NIIT was included as a revenue-raising tool in order to offset the costs of the Affordable Care Act.
Even if you owe NIIT on your rental property income, there are ways to potentially reduce your income tax liability.
Under Section 1411 of the Internal Revenue Code, Net Investment Income Tax is a 3.8% surtax that applies to certain net investment income, such as interest, dividends, royalty income, non-qualified annuities, capital gains, and income from rental property. NIIT can apply to individuals, estates, and trusts that have income above a certain threshold amount.
The statutory threshold amounts are:
This applies to income acquired from a trade or business that classifies as passive income, including income from business trading financial instruments or commodities.
NIIT depends on your modified adjusted gross income (MAGI). This can be defined as your household’s adjusted gross income, including any tax-exempt interest income and certain deductions.
If you generate income from your rental property and your MAGI exceeds the thresholds listed above, then the 3.8% will apply to your net investment income or the portion of your MAGI that goes over the threshold, whichever is less.
Here are two examples:
.038 x $10,000 = $380 owed
If your income is above the statutory threshold amount, then yes, you would owe the 3.8% NIIT. However, there are ways you can potentially reduce your MAGI, such as:
However, if you do owe NIIT from your rental property, you must file IRS Form 8960 with your tax return and you must make quarterly estimated payments on the amount you think you'll owe, as well as any quarterly income payments.
This material is for general information and educational purposes only. Information is based on data gathered from what we believe are reliable sources. It is not guaranteed as to accuracy, does not purport to be complete and is not intended to be used as a primary basis for investment decisions. Realized does not provide tax or legal advice. This material is not a substitute for seeking the advice of a qualified professional for your individual situation. Costs associated with a 1031 transaction may impact investor’s returns and may outweigh the tax benefits.