Download The regrouping of activities for RE professionals under the 3.8% Net

New York Real Estate Journal
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nyrej.com
Tuesday, May 27, 2014
The regrouping of activities for R.E. professionals
under the 3.8% Net Investment Income Tax
Sandy Klein
Shanholt
Glassman
Klein Kramer
For tax years beginning after
December 31, 2012 a 3.8 %
medicare tax is imposed on the
lesser of an individual’s net investment income, or modified
adjusted gross income in excess of
$200,000 ($250,000 in the case of
a jointly filed income tax return).
Net investment income is generally defined as income from
interest, dividends, annuities,
rents and royalties, as well as
trade or business income from a
passive activity. In addition to the
ordinary income derived from the
aforementioned sources the Net
Investment Income Tax (NIIT)
also applies to the gains derived
from the disposition of the underlying assets, and to the disposition
of interests in partnerships, and
S corporations if the activities
conducted constitute a passive
activity.
Income from rents is generally considered a passive activity
subject to the above referenced
additional tax, unless the real estate professional rules of IRC Sec.
469(c) (7) apply and the taxpayer
Net investment income is generally defined as income from interest, dividends,
annuities, rents and royalties, as well as trade or business income from a passive activity. In addition to the ordinary income derived from the aforementioned
sources the Net Investment Income Tax (NIIT) also applies to the gains derived
from the disposition of the underlying assets, and to the disposition of interests in
partnerships, and S corporations if the activities conducted constitute a passive
activity.
materially participates in which
case, the income is re-characterized
as non passive income. However
the statute generally provides that
each rental real estate activity/
In addition to the requirements
of IRC Sec. 469(c ) (7) which
remove the per se passive characterization, the activity must also
be a “trade or business” within the
In addition to the requirements of IRC Sec. 469(c ) (7)
which remove the per se passive characterization,
the activity must also be a “trade or business” within
the meaning of IRC Sect 162 in order to avoid the NIIT.
property is treated as a separate activity therefore it could be difficult,
to meet the definition of material
participation in any one rental real
estate activity. There is however
another provision which permits
an election to aggregate all of the
professional’s interests in rental
real estate as one activity, whereby
one would likely meet the material
participation tests. As a general
rule, this aggregation election
is made at the time the taxpayer
becomes a real estate professional,
and is irrevocable once made.
meaning of IRC Sect 162 in order
to avoid the NIIT. If the activities
are not a Sect 162 trade or business
such as net leased property then
the NIIT will apply in spite of
the taxpayer’s qualification as a
real estate professional. Neither
the proposed nor final regulations
contain a clear bright line definition of what activities constitute
a trade or business.
The aggregation of activities
for the real estate professional
does not necessarily mean that the
activity will qualify as a trade or
Tel: 781-878-4540, Fax: 781-871-1853, 800-654-4993
business for NIIT purposes. Basic
to the determination of passive
activities, taxpayers have to group
investments to determine their
level of participation in the activity
consisting of the grouped investments. Once these groups were
decided they cannot be changed.
The IRS has determined that the
advent of the NIIT is a material
change in facts and circumstances which permits a regrouping
election. Thus there is a new opportunity to revisit the effects of
a prior grouping election for the
first year the taxpayer becomes
subject to the NIIT.
In conclusion, a careful analysis
of the taxpayer’s present grouping
election should be conducted in
order to maximize the tax benefits
of grouping under the NIIT.
Sandy Klein, CPA, is a partner
at Shanholt Glassman Klein
Kramer & Co., New York, N.Y.