The Health Care and Education Reconciliation Act of 2010 (Reconciliation Act), P.L. 111-152, imposes an additional 3.8% tax on net investment income, which includes income from common financial investments and from passive trade or business activities, including real estate rentals.
Starting in 2013, this tax raises the stakes for taxpayers pursuing real estate activities, particularly rentals. It increases potential financial downsides to pursuing passive activities or activities that the IRS may deem passive under Sec. 469. If the passive activity operates at a net loss for the year, the losses in excess of income are generally not currently deductible (deferred), and if the activity operates at a net gain, the profit can be hit with the additional 3.8% tax. Consequently, meeting the tests for qualifying as a real estate professional and material participation can be doubly important. Continue Reading →