Net Investment Income Tax (NIIT)

What is the net investment income tax?

The net investment income tax (NIIT) is a 3.8% federal surtax on investment income for higher earners: modified adjusted gross income above $200,000 (single) or $250,000 (married filing jointly), thresholds that are not indexed for inflation and therefore capture more taxpayers every year. Net rental income, capital gains from property sales, dividends, interest, and REIT distributions all count as investment income.

The tax applies to the lesser of your net investment income or the amount your MAGI exceeds the threshold. For real estate investors this means the surtax stacks on top of regular taxes: a large rental portfolio’s income, the capital gain from selling a property, and even the unrecaptured depreciation portion of that gain can each pick up the extra 3.8%.

Real estate offers some specific outs. Real estate professionals whose rental activity is a non-passive trade or business are exempt on that rental income. Gains deferred through a 1031 exchange escape NIIT along with everything else (no sale, no gain recognized). The Section 121 exclusion removes excluded home-sale gain from the calculation, and because the thresholds are cliff-adjacent, timing income, harvesting losses, and installment sales are all standard NIIT-management tools.

Worked example

A married couple has $230,000 of wages and $60,000 of net rental income, putting MAGI at $290,000. The excess over the $250,000 threshold is $40,000, which is less than their $60,000 of investment income, so NIIT = 3.8% × $40,000 = $1,520 on top of their regular income tax.

Frequently asked questions

Does the NIIT apply to the sale of my home?

Only to gain above the Section 121 exclusion. If you qualify to exclude $250,000/$500,000 of primary-residence gain, that excluded amount never enters the NIIT calculation. Gain beyond the exclusion counts as investment income and can trigger the 3.8% surtax if your MAGI, which the gain itself inflates, exceeds the threshold in the year of sale.

Can real estate investors avoid the NIIT on rental income?

The cleanest exemption is real estate professional status combined with material participation, which makes rental income non-passive trade-or-business income outside NIIT’s reach. Otherwise the levers are indirect: keep MAGI under the threshold in high-income years, use depreciation and cost segregation to shrink net rental income, defer gains with 1031 exchanges, and spread large sales across years with installment agreements.

Related tools and guides

• Capital Gains on Rental Property