Since 2013, the 3.8% net investment income tax (NIIT) has further complicated tax planning for high-income taxpayers. An often-overlooked aspect of the NIIT is its impact on the sale of a home.

Whom the NIIT Affects

Taxpayers with modified adjusted gross income (MAGI) exceeding the following thresholds are subject to the NIIT:

• Single or head of household $200,000
• Married filing jointly $250,000
• Married filing separately $125,000

The NIIT equals 3.8% of your net investment income or the amount by which your MAGI exceeds the applicable threshold, whichever is less.

How Home Sales Can Trigger the NIIT

If your MAGI is already high enough that you’re subject to the NIIT, a capital gain on a home sale is considered investment income for NIIT purposes and, therefore, could be subject to the tax. But even if you’re not ordinarily subject to the NIIT, the gain on a home sale could increase your MAGI enough that you become subject to the tax.

Fortunately, the NIIT doesn’t apply to gains eligible for the home sale exclusion, which applies to the first $250,000 ($500,000 for joint filers) of gain from the sale of a principal residence. Gains in excess of the exclusion and gains on home sales that don’t qualify for the exclusion (such as if you’ve sold a vacation home or you don’t meet other tests for the exclusion) will generally be included in net investment income for NIIT purposes.

How to Reduce NIIT on Your Home Sale

There are many possible ways to reduce or even eliminate the NIIT on a home sale that isn’t fully protected by the gain exclusion. Here are a few examples:

Carefully track home improvements. Improvement costs generally increase tax basis in your home, which reduces the gain you recognize on the sale of the home. By carefully tracking and documenting these costs, you can reduce your gain — perhaps significantly, depending on the extent of improvements you’ve made to the home.

Convert your vacation home. If you’re considering selling your vacation home or another nonprincipal residence, see if it would be possible to first convert the home into your principal residence to enjoy at least a partial exclusion. If you already spend a lot of time there during the year, you might not need to make that many changes to achieve the conversion. But the rules are complicated.

Look for unrealized losses in your portfolio. Consider selling securities or other investments that have declined in value so you can recognize losses that can offset some or all of the gain from your home sale.

Who Can Help

There are many other ways to reduce your NIIT liability. For more ideas, see our previous blog on this topic. And contact us to learn more about the NIIT and the potential tax impact of a home sale.