For the purpose of NIIT is the sale of assets from a Self-Storage Facility considered a Trade or Business or Rental Real Estate? Client is a General Partner and meets the Material Participation Rules. Any reference would be helpful.
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Found something
It would hinge on whether or not the taxpayer's business was considered a Rental Real Estate activity or an activity that rose to a level of a Trade or Business. If little or no services were rendered to the clients, I am thinking the storage unit business will be considered a rental activity, which would expose the gains from the "real estate" assets sold to the NII Tax. See Look at Hopper v. Commr., 94 TC 542 and Bobo v. Commr. 70 TC 706.
See the following example from the Proposed Reg. 1.1411-4:
Example 1. Gain from rental activity.
A, an unmarried individual, rents a boat to B for $100,000 in Year 1. A's rental activity does not involve the conduct of a section 162 trade or business, and under section 469(c)(2), A's rental activity is a passive activity. In Year 2, A sells the boat to B, and A realizes and recognizes taxable gain attributable to the disposition of the boat of $500,000. Because the exception provided in paragraph (d)(4)(i)(A) of this section requires a trade or business, this exception is inapplicable, and therefore, A's $500,000 gain will be taken into account under ยง 1.1411-4(a)(1)(iii).
I don't like that they used a boat in this example. Who rents a boat?? Well, I know boats get bigger than bass boats BUT not in my neck of the woods!!!
However, I've read somewhere that the gain that falls under 1250 recapture does not get included in income subject to NII. Do some digging around to see if that holds up. Just a side note, I tested this theory in my tax software (Don't use that as your final analysis) and the 1250 Gain (attributed to depreciation recapture on real estate) was specifically deducted from the NII worksheet.Circular 230 Disclosure:
Don't even think about using the information in this message!
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