What the NIIT is and who it affects
The Net Investment Income Tax (NIIT) is a 3.8% surtax imposed by Internal Revenue Code Section 1411. It applies to taxpayers with modified adjusted gross income (MAGI) above: $200,000 for single filers, $250,000 for married filing jointly, and $125,000 for married filing separately. These thresholds are not indexed for inflation. The NIIT is calculated on the lesser of net investment income or the amount by which MAGI exceeds the threshold.
What real estate income it covers
For landlords, the NIIT applies to net rental income (gross rents minus allowable rental expenses) and to capital gains from selling investment property, including the depreciation recapture portion. Critically, if you qualify as a Real Estate Professional (REPS) and materially participate in each rental property, the rental income and gains may be excluded from NIIT because they are treated as non-passive income.
Planning to minimize NIIT exposure
The NIIT stacks on top of existing capital gains and recapture rates — bringing the combined federal rate on recapture to as high as 28.8% and on long-term capital gains to as high as 23.8% for high earners. Strategies to reduce NIIT: (1) qualify for REPS to reclassify rental income as non-passive; (2) use a 1031 exchange to defer the gain and the NIIT on it; (3) use an installment sale to spread MAGI below the threshold across multiple years; (4) harvest capital losses to reduce net investment income in high-income years.
Frequently asked questions
What is the 3.8% NIIT on real estate?
A surtax on rental income and capital gains for taxpayers with MAGI above $200,000 single / $250,000 married filing jointly. It adds to, not replaces, regular capital gains and recapture rates.
Does the NIIT apply to depreciation recapture?
Yes — for taxpayers above the MAGI threshold, the recapture gain from a rental sale is subject to the 3.8% NIIT on top of the standard 25% recapture rate.
Sources
Educational information and estimates only. Not tax advice. Tax rules change and vary by situation; consult a qualified tax professional before acting.