Last week the IRS issued its final regulations governing how it will implement a new “Obamacare tax” that imposes a 3.8 percent levy on unearned income.
Taxpayers are subject to the Net Investment Income (NII) tax if their adjusted gross income (AGI) for the year exceeds $200,000 for singles, or $250,000 for marrieds filing jointly ($125,000 for marrieds filing separately).
If your AGI exceeds the applicable threshold, you’ll have to pay the NII tax on the lesser of (1) your net investment income, or (2) the amount that the your AGI exceeds the $200,000/$250,000 threshold.
“Unearned income” means income from all “passive” activities, including interest, dividends, annuities, royalties and rents. It does not include income from an actively conducted business.
However, it includes income from real estate rentals, even those that qualify as businesses, because rental income is always deemed to be passive income for tax purposes. Thus, landlords with profitable rentals whose AGI exceeds the threshold will be subject to the 3.8 percent tax on their rental income.
However, there is one lucky group of landlords who can avoid the NII tax on rental income: real estate professionals. As I explained in a prior article (“It pays for landlords to qualify as ‘real estate professional‘ “), the NII law provides a special exemption for them. They are not subject to the 3.8 percent tax on rental income if they “materially participate” in the real estate activity, and the activity qualifies as a business for tax purposes.
Senior Director, Coldwell Banker New Homes Division
With over 200 condominium, townhome and loft projects successfully marketed
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