Personal Finance & Estate › Income, gift, estate & real-estate taxes › Capital gains tax (short- vs. long-term)
Net investment income tax (3.8%)
Since 2013· Tax rule
Law or rule (2026)Set by statute, regulation or the agency; numbers change yearly.
A 3.8% federal surtax on investment income, including rents and capital gains, for higher-income households.
See it on the Personal Finance & Estate map →How it works
It applies to the smaller of your net investment income or your modified AGI above $200,000 single or $250,000 joint; those thresholds aren't indexed, so more people pay each year. Investment income includes interest, dividends, capital gains, rents, royalties and passive business income. Excluded: wages, IRA and 401(k) withdrawals (though they raise AGI), home-sale gain covered by Section 121, and income from businesses you actively run. Trusts pay it above about $16,000 of retained income.
Why it matters for you
On a big building sale it adds 3.8% to both capital gain and recapture; real estate professional status or active business income can avoid it.
Rules, limits and sources (2026)
IRC Sec. 1411, enacted in the 2010 health-care law and effective in 2013; Treasury regulations (2013) define net investment income; IRS Form 8960 computes it.
Watch out for
Whether active owners' rents escape it often turns on hours and facts; the IRS and taxpayers keep litigating the boundaries.
Connections (2)
▸Net investment income tax (3.8%) adds 3.8% on top of Capital gains tax (short- vs. long-term)Law or rule (2026)
How they connect
For higher earners, the NIIT adds 3.8% on top of the regular capital-gains rate, making the top federal rate 23.8% on long-term gains and 28.8% on depreciation recapture. It hits investment income above the $200,000/$250,000 thresholds. Gains excluded under the home-sale rule or deferred in a 1031 aren't touched.
When it applies
Enacted in the March 2010 health-care reconciliation law to help pay for the Affordable Care Act; despite its 'Medicare contribution' name, revenue goes to the general fund. It first applied to 2013 income.
The rule
IRC Sec. 1411 and Form 8960; Treasury regulations (2013) define gains from property as net investment income.
Watch out for
Whether the NIIT should extend to high earners' active business income, as proposed in 2021, remains a live debate.
▸Passive-loss rules & real estate professional status can help rental owners avoid Net investment income tax (3.8%)Depends on you
How they connect
Rents are net investment income by default. But a real estate professional who materially participates, with a safe harbor at 500+ hours a year in rental activity, can treat rents and gains as trade or business income, outside the 3.8% NIIT. That can save 3.8% on both yearly rents and a large sale.
When it applies
Treasury's 2013 NIIT regulations added the 500-hour safe harbor for real estate professionals.
How sure?
Treasury Reg. Sec. 1.1411-4(g)(7); IRS Form 8960 instructions explain the exception.
Watch out for
Qualifying turns on documented hours and facts; courts have split on borderline cases, and the IRS scrutinizes these claims. Ask your CPA before relying on it.