What Is the Net Investment Income Tax (NIIT)? How It Affects Rental Investors
The NIIT is a 3.8% surtax on net investment income (including passive rental income) for taxpayers with AGI above $200,000 (single) or $250,000 (married). STR investors who use the STR loophole or REPS convert rental income from passive to active — avoiding NIIT entirely on that income.
The Affordable Care Act (2010) imposed a 3.8% net investment income tax on high-income taxpayers. For rental property investors, passive rental income falls squarely in the NIIT's crosshairs — adding a 3.8% surcharge on top of ordinary income taxes on net passive rental income.
What Income Is Subject to NIIT?
Net investment income includes: interest, dividends, capital gains, rents from passive activities, and income from passive trade or business activities. The key word: passive. Active income — wages, self-employment income, active business income — is not subject to NIIT.
For rental investors, the distinction is critical. Passive rental income (from long-term rentals without REPS) is subject to NIIT. Active rental income (from STRs with material participation, or any rental with REPS) is not.
The NIIT Threshold and Calculation
| Filing Status | MAGI Threshold | Tax Rate | Applied To |
|---|---|---|---|
| Single | $200,000 | 3.8% | Lesser of NII or MAGI above threshold |
| Married Filing Jointly | $250,000 | 3.8% | Lesser of NII or MAGI above threshold |
| Married Filing Separately | $125,000 | 3.8% | Lesser of NII or MAGI above threshold |
Example: A married couple with $300,000 in MAGI ($250,000 in wages + $50,000 in passive rental income) would owe NIIT on the lesser of (a) their NII ($50,000 in passive rent) or (b) $50,000 ($300,000 − $250,000 threshold). The NIIT = $50,000 × 3.8% = $1,900.
How the STR Loophole Eliminates NIIT on Rental Income
When STR rental income is active (non-passive) because of the STR loophole or REPS, it is not included in net investment income. The 3.8% NIIT does not apply. For an investor generating $100,000/year in STR income with an active classification, avoiding NIIT saves $3,800/year — not transformative by itself, but meaningful as part of the overall tax picture.
More significantly, cost segregation losses from an active STR reduce active income rather than passive income — potentially reducing MAGI below the NIIT threshold entirely in the year of the study.
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NIIT avoidance is one more benefit of the STR loophole + cost segregation strategy. Get your free estimate.
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