Starting in 2013, taxpayers married filing jointly with a modified adjusted gross income of $250,000 or greater will pay an extra 3.8% tax on the lesser of net investment income or the excess of modified adjusted gross income over $250,000.

Clarifications in the final regulations include:

  • Real Estate Professionals are now offered a safe harbor.  As long as they participate in rental real estate activity for greater than 500 hours per year the associated rental income will be presumed to be derived in the ordinary course of business. Thus, not subject to the 3.8% Net Investment Income Tax.
  • Self-rental income can be excluded from the 3.8% tax provided that rental income is recharacterized as non passive by the self-rental rules or that the rental property is grouped with a trade or business.
  • Self-charged interest from a S-Corporation or Partnership maybe excluded from net investment income in  the amount equal to the individual’s allocable share of the flow through entity’s deduction.
  • The final regulations clarify that net gains for the sale of property cannot be below zero. However, losses in excess of gains may be eligible to reduce other investment income. The IRS also issued proposed regulations explaining the use of capital loss carry forwards against NIT.
  • Any taxpayer can elect in the first year they have net investment income and modified adjusted gross income in excess of the applicable threshold to group or regroup their activities under section 469.
  • Suspended passive losses from a former passive activity can now be used to offset the income from that same activity even though it is now it is non passive.
  • The final regulations also provided clarification for the use of net operating losses, the foreign tax credit, itemized deductions, and the sale of stock and partnership interest.

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