The Net Investment Income Tax
Real Estate Pros may be liable for the NIIT. The NIIT, or Net Investment Income Tax, is a 3.8% levy on passive investment income for certain high-income taxpayers.
However, the IRS gives Real Estate Pros an exemption from this additional tax. The NIIT doesn’t apply to a real estate pro’s rental income if the taxpayer spends over 500 hours in the current year (or 500 hours in 5 of the previous 10 years) in rental activities.
A Real Estate Pro is a tax return filer who spends over 50% of their working hours and 750 or more hours a year materially participating in real property trades or businesses.
A taxpayer Materially Participates in a trade or business by meeting at least one of the seven following tests:
- Works 500 hours or more in the activity during the year.
- Does all, or nearly all, of the work in the activity.
- Works more than 100 hours in the activity during the year, and no one else works more.
- The activity is a significant participation activity (SPA), and the sum of the SPAs in which you work 100–500 hours exceed 500 hours for the year.
- Materially participates in the activity in any 5 of the previous 10 years.
- The activity is a personal service activity in which the taxpayer materially participated in that activity in any three prior years.
- Based on all the facts and circumstances, you participate in the activity on a regular, continuous, and substantial basis during that year. Taxpayer must work at least 100 hours in the activity, no one else works more hours in the activity, and no one else receives compensation for managing the activity.