Thinking about selling your rental property? Maybe you are done patching drywall, replacing dishwashers, or dealing with 2 a.m. texts about buzzing smoke detectors. Maybe the market finally makes sense.
Either way, smart move. But here’s what most landlords never see coming.
The IRS has a little-known fee for successful people. It is called the Net Investment Income Tax, or NIIT for short.
If you do not plan ahead, this quiet 3.8 percent surtax could eat into your profits. That’s real money, and it should be funding your next deal, vacation, or fishing boat… not padding the IRS party fund.
What Is NIIT? (And Why It Matters When Selling Rental Property)
The Net Investment Income Tax on rental property kicks in when your income crosses certain thresholds:
- $200,000 if you’re single
- $250,000 if you’re married and filing jointly
NIIT applies to income from investments. That includes profits from selling real estate. Even if the property has been your financial headache for years, the IRS still wants a piece when it sells.
How to Avoid NIIT on Rental Property Sale
Let’s get right to the good stuff. How to avoid NIIT without needing a CPA license or a bottle of Tylenol.
1. Make It Active
If you are a real estate professional and you log at least 750 hours a year in the business, and it’s your main gig, you might be off the hook for NIIT. This applies to folks actively managing or developing properties, not just collecting rent.
2. Use a 1031 Exchange
This lets you trade one property for another and defer both capital gains tax and the NIIT. Just stick to the IRS rules: identify the next property within 45 days, and close the deal within 180 days. Think of it like Monopoly, but with real consequences and a lot more paperwork.
3. Lower Your MAGI
Your Modified Adjusted Gross Income (MAGI) determines whether NIIT applies. If you can keep your income below the threshold through timing, deductions, or smart tax planning, you avoid the tax entirely.
4. Consider an Installment Sale
Instead of taking a lump sum when you sell, spread the income over several years. This can keep your annual income lower, possibly under the NIIT threshold, and reduce your overall tax bill.
Need a Strategy?
You’ve got a business to run. You should not need to moonlight as a tax strategist just to sell a rental.
That is what we do at Solution 8020. We help business owners and landlords keep more of what you earn and sidestep ugly surprises like the NIIT.
If you are even thinking about selling a property, now is the time to plan. Let’s run the numbers and see what is possible.
The Net Investment Income Tax is a classic example of what happens when you do not plan. It is small, sneaky, and expensive. But if you are proactive, it’s totally avoidable.
Even if you are not ready to sell yet, the smartest tax moves happen early. Not in April when it is too late.
