Net Investment Income Tax on Excess Gain from Sale of Personal Residence

[rjrobertscpa]

My client has an extremely high gain of approximately $6 million from sale of a personal residence in excess of the $500,000 exclusion.
The tax software I'm using has calculated the NIIT on this gain as if it was passive investment income.
Isn't gain from the sale of personal residence excluded from investment income for purposes of calculation the Net Investment Income Tax.

[Snaggletooth]

Why would it be?

My client has an extremely high gain of approximately $6 million from sale of a personal residence in excess of the $500,000 exclusion.
The tax software I'm using has calculated the NIIT on this gain as if it was passive investment income.
Isn't gain from the sale of personal residence excluded from investment income for purposes of calculation the Net Investment Income Tax.

Investment income is irrelevant as to whether it is passive or "active." Passive reporting only affects treatment of losses in years where losses affect the reporting.

Don't know why $5.5 million would be exempt from the NIIT unless it is exempt by Code or Regs. Taxpayer probably wonders why it would be classified as "investment income" since he did not invest for purposes of income. Does anyone know whether there is relief in the Code or Regs?

[kathyc2]

Investment income is irrelevant as to whether it is passive or "active." Passive reporting only affects treatment of losses in years where losses affect the reporting.

Don't know why $5.5 million would be exempt from the NIIT unless it is exempt by Code or Regs. Taxpayer probably wonders why it would be classified as "investment income" since he did not invest for purposes of income. Does anyone know whether there is relief in the Code or Regs?

I think the confusion or passive /non-passive is coming from the exemption from NIT if actively participating in pass through entity.

Sale of personal residence is subject to NIT after applying any basis and exclusion.

[Roland Slugg]

The tax software I'm using has calculated the NIIT on this gain as if it was passive investment income.

No. Your tax software has calculated the NIIT on this gain because it is "investment income" as defined in Code §1411 and Regs §1.1411-4(a)(1)(iii).

Isn't gain from the sale of personal residence excluded from investment income for purposes of calculation [sic: calculating] the Net Investment Income Tax.

No, it is not. The §121 exclusion is not added back when figuring the NIIT, but the taxable gain on the sale of someone's residence is subject to the NIIT just like all other capital gains.

Your client may be able to deduct a portion of his tax-deductible expenses when figuring the net amount subject to the NIIT, per Regs §1.1411-4(a)(2). The largest of these is probably the state income taxes attributable to the gain. See page 14 of the instructions for F-8960.

[DonB]

Here is an example why this forum is better than many continuing education courses

"Your client may be able to deduct a portion of his tax-deductible expenses when figuring the net amount subject to the NIIT, per Regs §1.1411-4(a)(2). The largest of these is probably the state income taxes attributable to the gain. See page 14 of the instructions for F-8960."

A great tax planning strategy if you have advance knowledge: Make sure state estimated tax is paid in the year of sale so it is properly deducted on the tax return and deducted from investment income on the 8960.