As we approach the end of 2021, many real estate investors are already thinking of the 2022 tax season -- and for good reason. A new administration almost always adopts new rules and regulations, and the tax code is no exception.
One of the targets of the administration of President Joe Biden is the net investment income tax (NIIT), and perhaps rightfully so. For 2021, the government will raise $27.5 billion in revenue generated from net investment income tax alone, according an analysis by the Congressional Research Service.
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The net investment income tax is a 3.8% levy imposed on investment income from sources such as stocks, dividends, bonds, mutual funds, rent, royalties, loans and income derived from a business that is passive in nature (e.g., real estate investing). It also applies to capital gains from the sale of an investment property, including a second home.
If any portion of your passive income and your modified adjusted gross income (MAGI) are over the threshold, you (individuals, estates, and trusts) will be hit with the tax.
Here are the thresholds:
|
Filing Status |
Threshold Amount |
|---|---|
|
Married filing jointly |
$250,000 |
|
Married filing separately |
$125,000 |
|
Single |
$200,000 |
|
Head of household |
$200,000 |
|
Qualifying widow(er) |
$250,000 |
Data source: IRS.
Under the proposed net investment tax rules, the landscape of who will be exposed to the tax will change.
It may be a new day for the net investment income tax
The Biden administration wants to expand the types of income that will be subject to net investment income tax, proposing to subject individuals with active business income greater than $400,000 (for single filers) and $500,000 for joint filers, as well as for trusts and estates.
For the real estate world, this means individuals who are classified as real estate professionals may now be subject to the net investment income tax. This may be a shock to the industry, because many real estate professionals have been able to avoid this tax if they are deemed to have materially participated in a real estate trade or business. A real estate professional materially participates in a trade or business by passing one of the seven tests outlined by the IRS, which can be found here.
If these changes are adopted, even those who materially participated will be exposed.
The real estate industry, should these changes go into effect, may be changed forever. If you are a real estate professional who could be potentially hit with this tax, do not go at it alone. Although the IRS Form 8960 for paying the tax is only one page, it has 20 pages of instructions. That means you should always consult a tax advisor.
