Understanding the Net Investment Income Tax (NIIT) for Landlords

If your rentals earn a profit and you're a high-income taxpayer, you might be subject to a Medicare tax on your "unearned income." This tax is called the "net investment income tax," or "NIIT" for short. It's also often referred to as the "Medicare contribution tax." The NIIT is complicated, but here's an overview of how it might affect you as a landlord.

What Is the NIIT?

The NIIT is a 3.8% income tax on unearned income. "Unearned income" is, for tax purposes, income other than that from a job or business in which you actively participate. If you're a higher-income taxpayer, you must pay it in addition to your regular income taxes.

The tax is due when you file your tax return—but note that you might have to include it in any estimated taxes you file throughout the year, or risk a penalty.

Which Landlords Are Subject to the NIIT?

Landlords are subject to the NIIT only when:

• their adjusted gross income (AGI) is above the annual threshold amount, and
• they have net investment income.

Annual Threshold Amount for the NIIT

Single landlords must pay the NIIT only when their AGI is over $200,000. Married landlords who file joint tax returns must pay the NIIT only when their AGI is over $250,000. Landlords who are married but file separate returns must pay it only when their AGI is over $125,000. Your AGI is the number on the bottom of your IRS Form 1040.

Not many landlords have this much income. However, a landlord who normally doesn't make the threshold AGI might have to pay the NIIT in a year that they sell rental property (or other investment property) for a substantial gain—the gain might be enough to boost their AGI over the threshold.

Net Income for Purposes of the NIIT

Having an AGI that exceeds the threshold amount doesn't necessarily mean a landlord is subject to the NIIT—they must also have "net investment income." Net investment income includes:

• net rental income (rent minus expenses)
• income from investments, including interest, dividends, and annuities
• income from any business in which you don't materially participate (aren't active in running), including real estate limited partnerships and other real estate investment businesses; and
• net capital gains (gains minus capital losses) you earn upon the sale of property that isn't part of an active business, including rental property, stocks and bonds, and mutual funds.

Net investment income doesn't include:

• income from a business in which you materially participate (actively run), any self-employment income, or wages from employment (this exception doesn't apply to rental activities, even if you materially participate in them; there's an exemption if you meet the IRS's definition of a "real estate professional")
• tax-exempt income (such as income from tax-exempt bonds)
• withdrawals from retirement plans, and
• life insurance proceeds, veterans benefits, Social Security benefits, spousal support, or unemployment benefits.

What Income Is the NIIT Imposed On?

The NIIT isn't imposed on your total AGI or investment income. Rather, it's assessed on the portion of your income that is the lesser of either your net investment income or the amount by which your AGI exceeds the applicable threshold.

Example: Phil and Penny are a married couple who file a joint return. Together they earn $200,000 in wages. They also earn $200,000 in net rental income and $150,000 in other investment income. Their AGI is $550,000, including $350,000 in net investment income. They must pay the 3.8% NIIT on the lesser of (1) their $350,000 of net investment income, or (2) the amount their AGI exceeds the $250,000 threshold for married taxpayers—$300,000. Since $300,000 is less than $350,000, they'll have to pay the 3.8% tax on $300,000. Their NIIT for the year will be $11,400 (3.8% × $300,000 = $11,400).

Your net rental income—your gross (total) rents minus deductible expenses—is included in your net investment income. Your deductible expenses for these purposes will generally be the same as shown on your Schedule E.

For example, if you earn $200,000 in gross rents in one year and have $100,000 in expenses, you'll end up with $100,000 in net rental income that must be included in your adjusted gross income for that year. If you have a net loss from your rental activities, you can use it to reduce your AGI subject to the passive loss rules. This makes the rental property deductions available to landlords more valuable than ever.

The Real Estate Professional Exemption: Some High-Earning Landlords Are Exempt from the NIIT

The IRS has a special exemption from NIIT for qualifying real estate professionals. You must satisfy the following three tests to be eligible for this exemption:

1. You must be a real estate professional (spend more than 50% of your work time in a real estate business or businesses and more than 750 hours working in a real estate business)
2. You must materially participate in the rental activity.
3. Your rental activity must qualify as a business for tax purposes.

Landlords who qualify for the real estate professional exemption are specifically exempted from the NIIT. (I.R.C. § 1411 (2025).) This includes full-time landlords, and many part-time landlords who engage in other real estate businesses such as real estate brokerage or development.

Avoiding the NIIT and Resources

The main way to avoid paying the NIIT is to keep your AGI for the year less than the applicable threshold. There are many ways to do this, including increasing your deductible rental losses, holding your rental property, and converting as much of your income as possible to tax-exempt income. A tax lawyer, accountant, or other financial adviser can help you craft a strategy that best suits your personal and business needs.

For a detailed explanation of the NIIT, tax strategy planning for landlords, and the real estate professional exemption, check out Nolo's Every Landlord's Tax Deduction Guide.