Net Investment Income Tax on Real Estate: 3.8% Rules, IRS Data

The questions people ask, answered by the rule that decides each one

The statute has one sentence that matters most for real estate. Net investment income is “gross income from interest, dividends, annuities, royalties, and rents, other than such income which is derived in the ordinary course of a trade or business not described in paragraph (2)”, and paragraph (2) describes a trade or business that is “a passive activity (within the meaning of section 469) with respect to the taxpayer” (26 U.S.C. 1411(c)(1)(A)(i) and (c)(2)(A)). Gains follow a parallel rule in (c)(1)(A)(iii), which counts “net gain (to the extent taken into account in computing taxable income) attributable to the disposition of property” other than property held in such a non-passive business. Everything below is that sentence applied to a situation.

Sources: 26 U.S.C. 1411 and 469 (U.S. Code, 2024 edition, Government Publishing Office); 26 CFR 1.1411-4, 1.469-1T and 1.199A-1 (eCFR, version of October 1, 2026); Instructions for Form 8960 (2025); Rev. Rul. 2004-86 (Internal Revenue Bulletin 2004-33). The plain-language column is our reading.

The table answers who is in; the amount is a second step. You pay 3.8% of the smaller of net investment income or MAGI above the threshold. The IRS’s own example: a single filer with $180,000 of wages and $90,000 from a passive partnership has MAGI of $270,000, $70,000 over the line, and “owes NIIT of $2,660 ($70,000 x 3.8%)” even though the investment income is $90,000.

What the IRS counted: 8.1 million returns, $39.3 billion for 2023

The IRS’s Statistics of Income (SOI) division publishes the tax every year in Table 3.3 of Publication 1304. We extracted the “Net investment income tax” columns from all eleven tables, 2013 through 2023, the latest year published (March 2026).

Source: IRS Statistics of Income, Publication 1304, Table 3.3 (files 13in33ar.xls to 23in33ar.xls), all returns. Estimates based on samples; amounts are in thousands of dollars in the source and rounded here. Shares and averages are our arithmetic.

Three readings, our arithmetic:

• The base keeps widening because the line does not move. The number of returns paying the tax grew 162.3% in ten years while the total number of returns grew from 147.4 million to 160.6 million. A $200,000 threshold set in 2010 catches more people every year that wages and prices rise; the statute has no inflation adjustment and Rev. Proc. 2025-32, the IRS list of 2026 inflation-adjusted amounts, has none for section 1411.
• The amount follows asset sales. The tax jumped to $59.70 billion for 2021 and fell to $40.99 billion for 2022 while the number of payers barely moved. On Form 8960, line 5a gains were $1,852.38 billion for 2021 against $860.66 billion for 2023.
• The average payer owes a few thousand dollars. For 2023 the average was $4,853 per paying return, the lowest in the series, which is what you would expect as more returns just over the threshold are pulled in.

Who pays: the last year with every income band published

From 2020 on, Table 3.3 shows the tax in one or two income bands only (for 2023, the $200,000 to $500,000 band and a $500,000 to $1,000,000 band that holds more NIIT returns, 2,320,285, than that band’s 1,779,720 returns, so it clearly carries the bands above it). The table’s footnote says data are “combined to prevent disclosure of specific taxpayer information.” The 2019 table is the last with every band separate.

Source: IRS Statistics of Income, Publication 1304 (November 2021), Table 3.3, tax year 2019. Rows below $100,000 of AGI (8,805 returns in all, our sum) are omitted; returns under $200,000 of AGI can owe the tax because MAGI can exceed AGI and the married-filing-separately threshold is $125,000. Sums and shares are our arithmetic.

Most payers are near the line and pay little; most of the money comes from the top. In 2019 the 19,827 returns with $10 million or more of AGI paid 31.5% of the tax, an average of about $449,642 each, while the typical payer between $200,000 and $500,000 paid about $1,054 (our arithmetic).

What Form 8960 shows about rental and business income

Publication 4801 gives line-by-line estimates for Form 8960, the form that computes the tax. Line 4a is where rental real estate goes, mixed with royalties, partnerships, S corporations and trusts; line 4b is where filers take out income from a trade or business that is not a section 1411 business, which is how a non-passive landlord or a real estate professional under the safe harbor removes rent.

Source: IRS Statistics of Income, Publication 4801 (Rev. 6-2026), 2023 Individual Income Tax Returns Line Item Estimates, Form 8960. “All figures are estimates based on samples.” Amounts are in thousands of dollars in the source.

What this does and does not say. Line 4a is not a rental line: it pools rent with every partnership, S corporation and business that reaches Schedule E or C, so we cannot split out real estate (our reading). What it does show is the size of the exclusion that the trade or business test controls: $1.08 trillion of income was backed out on line 4b for 2023, and the share was similar in the two earlier years we read, 90.1% for 2022 and 92.0% for 2021 (our arithmetic). Gains are the opposite: about half of the tax base is line 5d gains, and for 2023 filers removed 29.5% of line 5a as gain on property held in a non-passive business or otherwise outside the tax. Whether rent and gain land on line 4b and 5b is the single most valuable line-item question for a landlord near the threshold.

The trade or business wall, and why real estate professional status does not clear it

This is where most landlords and most of the published advice get it wrong. Two different tests have to be met, and they come from different sections:

1. Section 162 trade or business. The 2025 instructions say “The definition of trade or business for NIIT purposes is limited to a trade or business within the meaning of section 162,” which is narrower than the passive activity rules. In the preamble to the final regulations, Treasury declined to draw a bright line and listed the facts that matter: “the type of property (commercial real property versus a residential condominium versus personal property), the number of properties rented, the day-to-day involvement of the owner or its agent, and the type of rental”, such as a net lease against a traditional lease (T.D. 9644, 78 FR 72394, December 2, 2013). It cites the Supreme Court’s test that whether a taxpayer is carrying on a trade or business “requires an examination of the facts in each case” (312 U.S. 212, 217 (1941)).
2. Non-passive under section 469. Rental activities are passive unless an exception applies, such as real estate professional status with material participation, or a short-term rental that is not a “rental activity” at all.

Real estate professional status only answers the second question. The preamble is explicit: “the use of a taxpayer's real estate professional status as a proxy to determine whether rental income is derived in the ordinary course of a trade or business is not appropriate.” The Form 8960 instructions repeat it: “Qualifying as a real estate professional doesn't necessarily mean you're engaged in a trade or business with respect to the rental real estate activities.” Our real estate professional status guide covers the 750-hour and more-than-half tests, and how often they fail in court.

The safe harbor. To give real estate professionals a simpler route, 26 CFR 1.1411-4(g)(7) deems both the rent and the gain on sale to be trade or business items for a real estate professional “that participates in a rental real estate activity for more than 500 hours during such year”, or who has done so “for more than 500 hours in any five taxable years (whether or not consecutive) during the ten taxable years that immediately precede the taxable year.” Three details, from the regulation and the instructions:

• Per activity. The 500 hours are per rental real estate activity; with the section 1.469-9(g) election to treat all rental real estate as one activity, the hours are counted across all of them.
• The election also matters at sale. If you qualify in the year you dispose of the property, the gain is deemed trade or business gain and is not in net investment income.
• Missing the safe harbor is not fatal. Paragraph (g)(7)(iii): “The inability of a real estate professional to satisfy the safe harbor in this paragraph (g)(7) does not preclude such taxpayer” from showing the income is excluded on the facts.

Short-term rentals. A property whose “average period of customer use for such property is seven days or less” is not a rental activity under 26 CFR 1.469-1T(e)(3)(ii)(A). That moves it out of the automatic passive rule, but for the NIIT the instructions require all three: the exception applies, “the activity rises to a section 162 trade or business, and you materially participated in the activity.” An owner who uses a manager for everything can meet the 7-day rule and still owe the tax (our reading).

Self-rentals and grouping. Rent from a building leased to your own business in which you materially participate, or from a rental properly grouped with such a business, is deemed trade or business income under 26 CFR 1.1411-4(g)(6). This is the one case where the regulation does the section 162 work for you.

What the Tax Court has decided. We searched the Tax Court’s public opinion system for “net investment income tax” and “section 1411” on October 12, 2026. It returned 8 and 2 documents. None decides whether a rental is a trade or business for section 1411: in most, the tax followed computationally from other adjustments (one opinion calls such adjustments “purely computational”). The one published opinion on the tax itself, 157 T.C. No. 4 (2021), holds that a foreign tax credit under two treaties cannot offset it. For the rental question the governing texts remain the regulation, the preamble and the section 162 case law it cites.

Selling: when the gain is taxed, deferred or excluded

• Taxable sale of a rental or second home. The 2025 instructions: “gains from the sale of investment real estate, including a second home that is not a qualified principal residence under section 121, is subject to NIIT.” The regulation’s own example is blunt: a passive rental owner who sells for a $500,000 gain has the whole gain taken into account because the trade or business exception “requires a trade or business.” Depreciation recapture is part of that gain; see our depreciation recapture guide and the full sale arithmetic, with NIIT, in our capital gains tax on real estate guide.
• 1031 exchange. The instructions say gain “that isn't taxable by reason of section 121 (sale of a principal residence) or section 1031 (like-kind exchanges) isn't included in NII.” The regulation’s Example 4 follows the deferral to the end: no net investment income in the exchange year, but when the replacement land is later sold, “A's net investment income includes the $20,000 gain recognized from the sale of Blackacre.” The tax is deferred with the gain, not forgiven (our reading). Exchange mechanics are in our 1031 exchange rules guide.
• Installment sale. The regulation says “section 453 governs the timing of the gain recognition, but does not alter the character of the gain.” Each year’s recognized gain is tested against that year’s MAGI, which is why spreading a sale over several years can keep some or all of it under the threshold (our reading; see our seller financing guide).
• Selling an interest in a syndication. Section 1411(c)(4) counts gain only “to the extent of the net gain which would be so taken into account by the transferor if all property of the partnership or S corporation were sold for fair market value” just before the sale. The regulation meant to implement it, 26 CFR 1.1411-7, is still “[Reserved]” in the eCFR as of October 1, 2026, and the IRS’s Q&A points readers to the 2013 proposed version. Form 8960 line 5c is where the adjustment goes; only 18,775 returns used it for 2023.

REIT, BDC, DST and syndication investors

• REIT and BDC dividends are dividends, so they are net investment income (section 1411(c)(1)(A)(i)) and are carried to Form 8960, line 2. The REIT itself does not pay the tax: the instructions list “Real estate investment trusts” among trusts that are not classified as trusts for federal income tax purposes. The 20% deduction for section 199A dividends does not help here: “The deduction allowed under section 199A does not reduce net earnings from self-employment under section 1402 or net investment income under section 1411” (26 CFR 1.199A-1(e)(3)). See our section 199A dividends guide.
• Return of capital reported by a non-traded REIT is not a dividend when received; it lowers basis and shows up later as a larger gain when the shares are sold or redeemed, and that gain is in net investment income (our reading).
• Delaware statutory trusts. Rev. Rul. 2004-86 treats an exchange into a DST as “the exchange of real property for an interest in Blackacre, and not the exchange of real property for a certificate of trust or beneficial interest.” A DST holder is a passive owner of the rent stream by design, so the rent is net investment income and the gain is deferred only while it stays inside a 1031 chain (our reading). More in our DST guide.
• Syndication K-1s. Section 469(h)(2): “no interest in a limited partnership as a limited partner shall be treated as an interest with respect to which a taxpayer materially participates” (except as regulations provide). Rental income on a limited partner’s K-1 is therefore net investment income in the ordinary case. Losses from the same passive activities reduce it when they are allowed; our K-1 vs 1099-DIV guide explains the forms.

What Congress has done and proposed, as of October 12, 2026

Sources: GPO texts of Public Laws 111-152, 117-169 and 119-21; GPO engrossed text of H.R. 5376 (117th) and introduced texts of H.R. 609, H.R. 1700 and H.R. 3271 (119th); GPO BILLSTATUS files read on October 12, 2026. The bills were found through the GovInfo search service and a web search; GovInfo’s full-text search did not return H.R. 609, so other unlisted bills may exist. None of the three bills has a reported version.

The pattern matters for a real estate investor. The expansion that keeps coming back would not touch passive rent, which is already taxed; it would remove the trade or business exclusion that real estate professionals and active owners rely on, above $400,000 or $500,000 of MAGI. For 2026, the law is the 2010 text with its 2010 dollar amounts.

What a landlord or real estate investor can do with this before December 31

These are the levers the rules themselves create, not recommendations for any one return.

• Know which number binds. The tax is on the smaller of net investment income and MAGI above the threshold. If MAGI is $20,000 over the line, a $300,000 gain adds 3.8% of $20,000 plus whatever the gain itself adds to MAGI, so a sale can be the event that moves you from no tax to tax on most of the gain (our reading of section 1411(a)(1)).
• Timing a sale is the biggest dial. A sale in a year with lower other income, an installment sale spread across years, or a 1031 exchange all change how much gain meets the 3.8%. Each has its own cost; the tax only moves, it does not disappear, in the 1031 case.
• If you are counting on the real estate professional safe harbor, the 500 hours are measured “during such year.” Hours for 2026 have to be worked by December 31, 2026, and the 1.469-9(g) election that lets you count them across all your rentals is made with the original return.
• For a short-term rental, check that the average stay for 2026 is 7 days or less and that your involvement looks like a business under section 162, not just material participation.
• For REIT, BDC, DST and syndication income, assume it is in, plan estimated payments accordingly (the IRS: “The Net Investment Income Tax is subject to the estimated tax provisions”), and check where return of capital has lowered your basis before a redemption.
• Bring the Form 8960 questions to a CPA. Whether your rent goes on line 4b and your gain on line 5b is a facts-and-records question about section 162 and section 469. That is CPA or tax attorney work. A financial adviser match would not answer it, so this page does not offer one.

FAQ

Sources, read and saved on October 12, 2026: 26 U.S.C. 408, 469 and 1411, United States Code 2024 edition (Government Publishing Office, govinfo.gov); 26 CFR 1.1411-3, 1.1411-4, 1.1411-5, 1.1411-7, 1.469-1T and 1.199A-1 (eCFR, version of October 1, 2026); T.D. 9644, 78 FR 72394 (December 2, 2013, govinfo.gov); Instructions for Form 8960 (2025) and Form 8960; IRS, Questions and Answers on the Net Investment Income Tax (page updated September 14, 2026); Rev. Rul. 2004-86 (Internal Revenue Bulletin 2004-33); Rev. Proc. 2013-13; Rev. Proc. 2025-32; IRS Statistics of Income, Publication 1304, Table 3.3 for tax years 2013 to 2023, and Publication 4801 line item estimates for tax years 2021, 2022 and 2023, with our extraction scripts; U.S. Tax Court opinion 157 T.C. No. 4 and the DAWSON opinion search results; Public Laws 111-152, 117-169 and 119-21 and the GPO texts and bill status files of H.R. 5376 (117th Congress) and H.R. 609, H.R. 1700 and H.R. 3271 (119th Congress). Counts, shares, averages and readings marked as ours are CrowdfundedWealth arithmetic and reading. This is analysis of public documents, not investment, legal or tax advice.