What the NIIT is
The 3.8% Net Investment Income Tax applies to the lesser of (a) your net investment income or (b) the amount your modified adjusted gross income exceeds $200,000 for single filers or $250,000 for married filing jointly. Rental income and gains from selling rental property — including the depreciation recapture portion — are considered net investment income.
How it stacks on a rental sale
On a large sale, the total federal rate on recapture can reach 25% + 3.8% = 28.8% (if the NIIT applies), and the capital gains slice can reach 20% + 3.8% = 23.8%. Add state income tax on top and the combined rate on a rental sale can approach or exceed 35% in high-tax states.
Always factor NIIT into your net-proceeds estimate before listing a property.
One exception: active real estate
Rental income is generally passive and therefore NII. However, if you qualify as a real estate professional and the rental activity rises to the level of a trade or business, the income may not be NII. This is a complex area that requires professional guidance.
Frequently asked questions
Does depreciation recapture trigger the NIIT?
Yes — if your MAGI exceeds the threshold, the gain from selling a rental (including the recapture portion) counts as net investment income subject to the 3.8% tax.
What is the NIIT threshold?
$200,000 MAGI for single filers, $250,000 for married filing jointly. The 3.8% rate applies to the lesser of NII or the MAGI above those thresholds.
Sources
- IRS Topic No. 409 — Capital Gains and Losses
- IRS Publication 544 — Sales and Other Dispositions of Assets
- IRS Publication 946 — How to Depreciate Property
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.