What is the net investment income tax?
The net investment income tax is a 3.8% surtax on investment income for individuals, estates and trusts above set income levels. It took effect in 2013 and is charged in addition to regular income tax, so a landlord in the top bracket can pay 20% on long-term gain, up to 25% on unrecaptured section 1250 gain and another 3.8% on both.
Most rental owners run into it in two places: the net rent the property earns each year and the gain in the year it sells. The sale is where it bites, because one large gain can push income far past the threshold in a single year.
NIIT thresholds by filing status
NIIT starts at $200,000 of modified adjusted gross income for single and head of household filers, $250,000 for married couples filing jointly and qualifying surviving spouses, and $125,000 for married filing separately. The IRS says plainly that these amounts are not indexed for inflation, so they are the same in 2026 as they were when the tax started in 2013.
| Filing status | NIIT threshold (MAGI) |
|---|---|
| Married filing jointly | $250,000 |
| Qualifying surviving spouse | $250,000 |
| Single | $200,000 |
| Head of household | $200,000 |
| Married filing separately | $125,000 |
| Estates and trusts (2026) | $16,000 of adjusted gross income |
How NIIT is calculated: the lesser-of rule
NIIT equals 3.8% of the smaller of two numbers: your net investment income, or the amount your modified adjusted gross income exceeds your threshold. Because of that lesser-of test, someone with moderate wages and a large gain can pay NIIT on less than the full gain.
Modified adjusted gross income here means your adjusted gross income plus any foreign earned income you excluded under section 911. For most U.S. landlords MAGI is simply AGI, and the gain from the sale is already included in it.
What counts as net investment income for a landlord?
Net rental income and the gain from selling a rental are both net investment income unless they come from a nonpassive trade or business. The tax is computed on the net amount, after deductions properly allocable to that income.
- Net rents after operating expenses, interest and depreciation
- Gain on the sale of a rental building or land, including the part taxed as unrecaptured section 1250 gain
- Interest you receive on a seller-carry note
- Passive K-1 income and gain from a syndication or partnership
- Gain on selling a partnership or LLC interest, to the extent you were passive
- Allocable deductions reduce it, including a reasonable share of state income tax
What is not subject to NIIT?
Wages, self-employment income and income from a business you materially participate in are outside NIIT, along with tax-exempt interest, Social Security, alimony and distributions from qualified retirement plans. Gain on a home sale is also excluded to the extent section 121 excludes it from income.
Gain on property held in a nonpassive trade or business is excluded under Treas. Reg. 1.1411-4(d)(4). For most rental owners, that exception depends on real estate professional status, which is the next section.
The real estate professional exception and the 500-hour safe harbor
A qualifying real estate professional can keep rental income and sale gain out of NIIT, and Treas. Reg. 1.1411-4(g)(7) gives a safe harbor to make that easier. If you are a real estate professional under section 469(c)(7)(B) and you participate in a rental real estate activity for more than 500 hours during the year, or did so in any five of the ten preceding years, the rent is treated as earned in a trade or business and gain on selling that property is treated as trade or business gain.
Hours are counted the same way they are for material participation under section 469. If you elected to treat all of your rental real estate as a single activity, that grouping applies here too, which matters if you own several buildings. Our real estate professional status guide covers the 750-hour test and the election itself.
Missing the safe harbor isn’t automatically fatal. The regulation says you can still show the income isn’t net investment income under other parts of section 1411, though without the safe harbor you would need to show on the facts that the rental is a trade or business.
NIIT for trusts and estates in 2026
A non-grantor trust or estate owes NIIT on the smaller of its undistributed net investment income or the amount its adjusted gross income exceeds the dollar level where the top 37% bracket begins. Under Rev. Proc. 2025-32 that level is $16,000 for 2026, which is why trusts holding rental property hit NIIT so quickly.
Suppose a trust that owns an apartment building keeps $300,000 of net rent and gain and has $300,000 of AGI. NIIT is 3.8% of $284,000 ($300,000 minus $16,000), or $10,792. Income the trust distributes is taxed to the beneficiaries instead, and each one tests it against their own threshold. Grantor trusts and charitable trusts are not subject to NIIT at the trust level.
Worked example: NIIT on a $2 million gain
A married couple filing jointly earns $180,000 in wages and $60,000 of net rent, so their MAGI is $240,000, just under the $250,000 threshold. They sell a rental building for a $2,000,000 gain. Their MAGI becomes $2,240,000 and their net investment income $2,060,000.
Their MAGI is over the threshold by $1,990,000. The smaller of $2,060,000 and $1,990,000 is $1,990,000, so NIIT is $1,990,000 × 3.8% = $75,620. That comes on top of capital gains tax and the 25% maximum rate on unrecaptured section 1250 gain. Had one spouse qualified for the real estate professional safe harbor on that building, the rent and the gain would both drop out of NII and the NIIT would be $0.
| Line | Amount |
|---|---|
| Wages | $180,000 |
| Net rent | $60,000 |
| Gain on sale | $2,000,000 |
| MAGI | $2,240,000 |
| MAGI over $250,000 | $1,990,000 |
| Net investment income | $2,060,000 |
| Smaller of the two | $1,990,000 |
| NIIT at 3.8% | $75,620 |
How an installment sale or 1031 exchange changes NIIT
An installment sale spreads NIIT over the years you collect, but for a high-income seller it rarely saves much. In the example above, spreading the $2,000,000 gain evenly over five years puts MAGI at $640,000 a year. The smaller of $460,000 of NII and the $390,000 excess is $390,000, so NIIT is $14,820 a year, or $74,100 in total. That is only $1,520 less than a cash sale.
The installment method changes timing, not character. Treas. Reg. 1.1411-4 says the trade or business question is decided in the year of sale and applies to every later payment, and the interest on the note is net investment income when you receive it. Spreading works best when it keeps a year’s income under the threshold altogether, which is easier for a retiree than for someone with high wages.
A 1031 exchange postpones NIIT along with income tax. The regulations’ own example says gain not recognized under section 1031 is not net investment income, while gain recognized later, when the replacement property is sold, is. Any boot you receive is taxed in the year of the exchange. Holding until death wipes out the deferred gain through a stepped-up basis.
Form 8960 and estimated tax
NIIT is computed on Form 8960, filed with Form 1040 for individuals or Form 1041 for estates and trusts. It is subject to the estimated tax rules, so a large sale early in the year can create an underpayment penalty if you wait until April to pay.
Your CPA will carry the gain from Form 4797 and Schedule D to Form 8960, subtract allocable deductions and apply the lesser-of test. Have them run the numbers before you sign a contract, not after closing, because that is when installment terms or a 1031 exchange can still be built into the deal.
How this works for a 5+ unit apartment building
For most owners of a 5+ unit apartment building, both the operating income and the eventual sale are net investment income unless the owner or a spouse qualifies as a real estate professional and meets the 500-hour safe harbor. Owning through an LLC taxed as a partnership doesn’t change that; the character passes through on the K-1.
Limited partners in a syndication are almost always passive, so their share of rent and sale gain is NII. If you own a large building with partners, a sale of your interest is tested under section 1411(c)(4) as if the partnership sold its assets, to the extent you were passive. A section 1231 gain on the building is still investment income for NIIT unless one of the exceptions applies.
Selling your apartment building to Skyline
Skyline Capital Investments buys apartment buildings with five or more units nationwide. We can offer seller-carry terms when spreading the gain helps your numbers, and we work with 1031 exchange timelines when you plan to defer.
Send the address and unit count through the form on this page or call (469) 660-2977. We typically respond within 48 hours, and your CPA can compare the NIIT on a cash sale with an installment or exchange structure before you decide.
