Net Investment Income Tax
The Net Investment Income Tax is a 3.8% federal surtax on investment income for higher earners, applying to rental income, capital gains, dividends, and more.
Definition
The Net Investment Income Tax (NIIT) is an additional 3.8% federal tax on net investment income, enacted to help fund Medicare. It applies to individuals whose modified adjusted gross income exceeds $200,000 (single) or $250,000 (married filing jointly), thresholds that are not indexed for inflation.
Net investment income includes interest, dividends, capital gains, rental and royalty income, and income from passive businesses. The tax applies to the lesser of net investment income or the amount by which MAGI exceeds the threshold. So a sizeable real estate capital gain can push a seller over the line and add 3.8% on top of capital gains and depreciation recapture taxes.
A 1031 exchange helps here too: by deferring the capital gain, it also defers the NIIT that the gain would otherwise trigger. For investors near the thresholds, the 3.8% is a meaningful part of the total tax an exchange postpones.
Key points
- A 3.8% surtax on net investment income
- Applies above $200k single or $250k married filing jointly MAGI
- Covers capital gains, rents, dividends, interest, and royalties
- Deferred along with the gain in a 1031 exchange
Related terms
Jerry Baker founded Baker 1031 Investments to help exchange investors move from active property ownership into passive, institutional-quality real estate through DST, 721 exchange, mineral royalty, and Opportunity Zone strategies. He holds the FINRA Series 22 and Series 63 registrations and the Securities Industry Essentials (SIE) qualification. Read full bio →
Reviewed by the Aurora Securities, Inc. compliance team — Aurora Securities, Inc., member FINRA/SIPC. Last reviewed July 2026. Securities are offered through Aurora Securities, Inc.; Baker 1031 Investments, LLC is independent of Aurora Securities, Inc.
This glossary entry is educational and is not investment, tax, or legal advice, or an offer to sell or a solicitation to buy any security. Definitions are general and may not reflect your specific circumstances — consult your own CPA and attorney. Past performance does not guarantee future results.