There is a Safe Harbor for Certain Real Estate Professionals that qualify.
In the case of a Real Estate Professional that participates in a rental real estate activity for more than 500 hours during the year, or has participated in such a real estate activity for more than 500 hours in any five tax years (whether or not consecutive) during the 10 tax years that immediately precede that tax year, then:
(1) such gross rental income from that rental activity is deemed to be derived in the ordinary course of a trade or business and not subject to the Net Investment Income Tax; and
(2) gain or loss resulting from the disposition of property used in such rental real estate activity is deemed to be derived from property used in the ordinary course of a trade or business and not subject to the Net Investment Income Tax Regulation Section 1.1411-4(g)(7)(i).
For purposes of establishing participation for this purpose, any participation in the activity that would count towards establishing material participation under Code Section 469 is considered in Regulation Section 1.1411-4(g)(7)(ii)(A).
The term “Rental Real Estate Activity” means a rental activity within the meaning of Regulation Section 1.469-1T(e)(3). An election to treat all rental real estate as a single rental activity under Regulation Section 1.469-9(g) also applies for this purpose. However, any rental real estate that the taxpayer grouped with a trade or business activity under Regulation Section 1.469-4(d)(1)(i)(A) (i.e., where the rental activity is insubstantial) or Regulation Section 1.469-4(d)(1)(i)(C) (i.e., where a rental activity is grouped with a trade or business owned in an identical percentage) is not a rental real estate activity (Regulation Section 1.1411-4(g)(7)(ii)(B)).
The inability of a real estate professional to satisfy the above safe harbor does not preclude the taxpayer from establishing that such gross rental income and gain or loss from the disposition of property, as applicable, is not included in net investment income under any other provision of Code Section 1411 Regulation Section 1.1411-4(g)(7)(iii).
Please contact the office of Don Fitch Accountancy at (760)567-3110 or Email Don.Fitch@CPA.com if you have any questions or would like additional information.
DON FITCH, CPA
74478 Highway 111 #3
Palm Desert, CA 92260
Toll Free: (877)CPA-Help or (877)272-4357
Updated 02/27/2021 143-178