#Passive income tax professional
Once a taxpayer qualifies as Real Estate Professional, the taxpayer must still prove that his or her participation in the rental activities (and only the rental activities) was “ material.” For Real Estate Professionals that have rental income from many sources, the material participation test can be difficult to meet because under the default rule, the Real Estate Professional must satisfy the test relative to each rental property. To qualify as a Real Estate Professional, a taxpayer must: first, spend half of his or her time engaged in “real property trades or businesses” including development, construction, acquisition, conversion, property management, leasing, or brokerage and second, that time must add up to at least 750 hours. However, it excludes rental income that is derived “actively” in “the ordinary course of business.” In practical terms, income derived from the rental of real estate is per se passive, and thus taxable as net investment income for NIIT unless the taxpayer qualifies as a “ Real Estate Professional” under the Internal Revenue Code. The Internal Revenue Code’s definition of “net investment income” includes rental income.
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This Alert focuses on one strategy available to real estate investors to minimize their net investment income for NIIT purposes.
![passive income tax passive income tax](https://www.fool.co.uk/wp-content/uploads/2022/03/Passive-income-concept.jpg)
Because NIIT only applies to the lesser of the two categories-net investment income or modified adjusted gross income-taxpayers can minimize or altogether eliminate their NIIT liability by minimizing income in either category.
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NIIT is a 3.8% Medicare surtax applied to the lesser of a taxpayer’s net investment income or modified adjusted gross income once a taxpayer earns above statutory thresholds. Six years have passed since Congress enacted the Affordable Care Act, and taxpayers are still wondering how they can minimize their liability under the Act’s net investment income tax (“NIIT”), which went into effect in 2013.