The Internal Revenue Service has released final regulations for the Net Investment Income Tax that was included in the Affordable Care Act.
The 3.8 percent tax took effect on Jan. 1, 2013 and applies to individuals, estates and trusts that have certain investment income above certain threshold amounts. On Tuesday, the IRS and the Treasury Department issued final regulations providing guidance on the general application of the Net Investment Income Tax and the computation of Net Investment Income.
In addition, they issued proposed regulations Tuesday on the computation of net investment income as it relates to certain specific types of property
Comments may be submitted electronically, by mail or hand delivered to the IRS. For additional information on the Net Investment Income Tax, see the IRS's questions and answers page.
The Treasury and the IRS said they received numerous written and electronic comments on the original proposed regulations. The comments included requests for clarification and recommendations relating to the calculation of net investment income; the treatment of several special types of trusts; the interaction between various aspects of Section 469 and the regulations for them with the calculation of net investment income; the method of gain calculation regarding a sale of an interest in a partnership or S corporation; and multiple areas where the proposed regulations could be simplified.
In general, the final regulations follow the approach of the proposed regulations with some modifications in response to comments and questions that have arisen.
Among the changes is a safe harbor for real estate professionals. If a real estate professional participates in rental real estate activities for more than 500 hours per year, the rental income associated with that activity will be deemed to be derived in the ordinary course of a trade or business. Alternatively, if the taxpayer has participated in rental real estate activities for more than 500 hours per year in five of the last ten taxable years (one or more of which may be taxable years prior to the effective date of Section 1411 of the Tax Code), then the rental income associated with that activity will be deemed to be derived in the ordinary course of a trade or business. The safe harbor test also provides that, if the hour requirements are met, the real property is considered as used in a trade or business for purposes of calculating net gain.
The Treasury Department and the IRS said they recognize that some real estate professionals with substantial rental activities may derive such rental income in the ordinary course of a trade or business, even though they fail to satisfy the 500-hour requirement in the safe harbor test. As a result, the final regulations specifically provide that such a failure would not preclude a taxpayer from establishing that the gross rental income and gain or loss from the disposition of real property, as applicable, is not included in net investment income.