Net Investment Income Special Tax

[Snaggletooth]

For some reason, Drake is not considering the sale of rental property as "investment income" for purposes of the NIIT.

Is this correct?

[Roland Slugg]

Is this correct?

No. The gain from the sale of rental property should be included in calculating net investment income.

I don't use Drake, but there must be a checkbox where you can indicate that the gain is subject to the NIIT. If there is no checkbox, look for a worksheet where you can add-in the gain. The latter must be watched carefully, for if the amount of gain changes during data entry, the gain entered on the NIIT worksheet must be updated manually. The checkbox would eliminate this and would be a better solution.

[Snaggletooth]

Section 1411

Like yourself Sluggo, I don't know why this would be exempt. Drake shows the capital gain on Form 8960 but then reverses the amount on line 5b.

Drake is taking the most optimistic approach. There is no definition under Section 1411 as to what constitutes a "Trade or Business" with respect to rental property and this is the long pole in the tent. Periodicals tell us there are no regs or court cases to establish clarity.

This is critical because the capital gain exceeds $500,000.

[Rapid Robert]

Like yourself Sluggo, I don't know why this would be exempt. Drake shows the capital gain on Form 8960 but then reverses the amount on line 5b.[...]
This is critical because the capital gain exceeds $500,000.

I assume you would have told us if this taxpayer was classified as a real estate professional. That would be one reason why the gain would not be subject to NII.

[Snaggletooth]

Investment

I assume you would have told us if this taxpayer was classified as a real estate professional. That would be one reason why the gain would not be subject to NII.

Not a real estate professional. That makes the sale NOT an investment, maybe even removes capital gain treatment.

Thanks for your question.

[New York Enrolled Agent]

Not a real estate professional. That makes the sale NOT an investment, maybe even removes capital gain treatment.

Thanks for your question.

I do not know all your details but there are times when 5b) goes negative. See the instructions for 5b). I have not encountered any of these "reversals" but are there any input boxes in Drake data entry that you need to check or uncheck.

Line 5b—Net Gain or Loss From Disposition of Property That Is Not Subject to Net Investment Income Tax


Use line 5b to adjust the amounts included on line 5a for gains and losses that are excluded from the calculation of net investment income. Enter the amount of gains (as a negative number) and losses (as a positive number) included on line 5a that are excluded from net investment income. For example, line 5b will include amounts such as:


•Gain or loss from the sale of property held in a non-section 1411 trade or business.

1.However, if the losses are attributable to formerly suspended passive losses of the non-section 1411 trade or business, such gains and losses are excluded from net investment income to the extent the nonpassive income from the non-section 1411 trade or business is excluded from net investment income. See Regulations section 1.1411-4(g)(8) for more information and examples.

2.Gain or loss from the sale of property held in a non-section 1411 trade or business does not include substantially appreciated property that is recharacterized as portfolio income. See Substantially appreciated property, later.

•Gain attributable to net unrealized appreciation (NUA) in employer securities held by a qualified plan. See Net gain attributable to NUA in employer securities held by a qualified plan, later.


•Adjustments to your capital loss carryforwards for items of excluded loss. See Adjustments to your capital loss carryforwards, later.


Substantially appreciated property. Generally, Regulations section 1.469-2(c)(2)(iii)(A) provides that if an interest in property previously used in a nonpassive activity but not used in a passive activity for more than 2 years prior to disposition is substantially appreciated at the time of disposition, any gain from the disposition is treated as not from a passive activity. The recharacterized gain may be taken into account under section 1411(c)(1)(A)(iii) if the gain is attributable to the disposition of property and recharacterized as portfolio income.

[Snaggletooth]

Clarity, somewhat

NYEA you've made many things clear by enumerating certain instances where an entry on line 5b may be justified. There is still confusion (maybe universal confusion) about what constitutes a "trade or business" under section 1411.

Perhaps to emphasize my own lack of grasp, I have read the instructions as you suggest, and they include a large spreadsheet with language very cryptic to myself but maybe crystal clear to whomever wrote it. And with plenty of references to "trade or business" which is not defined.

I did call Drake today, and was quite unimpressed with their solution. They have an obscure field which must be populated in order for ANY such 4797 transaction to be taxable. So obscure that I didn't even notice it was there. I'm sure the government would not appreciate such an easy way to avoid NIIT on $500,000. Seems without any other assumption, the default would be taxable, with ways to negate this on a separate field within form 8960.

In school, my teachers used to tell me "part of being able to answer successfully is understanding the question to begin with." I suppose this is where I am in this odyssey. Your explanation of 1.469-2(c)(2)(iii)(A) whizzes over my head. And it's not your fault. Thank you for your response.

[ttbtaxes]

Isn't property rented to your wholly-owned business exempt from the NIIT?

[Nashville]

Self-Rental Not Investment

Can't be convinced how it is treated for NIIT, but it shouldn't be considered investment since it is subject to SE tax.