NIIT is a tax of 3.8% on the net investment income of individuals, estates and trusts. The amount subject to the tax is the lesser of net investment income or the amount of your modified adjusted gross income above the threshold amount ($250,000 for married taxpayers; $200,000 for single taxpayers).
What is considered net investment income?
In general, investment income includes, but is not limited to, interest, dividends, royalties, rents, net gains from the sale of property not held for use in a trade or business, and certain passive or trading income.
What income is not subject to NIIT?
Operating income from a trade or business in which the owner actively participates is not subject to NIIT. In addition, rents derived by a real estate professional in a rental trade or business in which they materially participate will not be subject the NIIT.
When is it beneficial to group real estate activities?
In many cases, owners of multiple properties may find it difficult to “materially participate” in each rental activity. This is where making an election to “group” the activities, which treats all activities in that group as one activity, can help to avoid the NIIT.