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Net Investment Income Tax (NIIT)

Net Investment Income Tax (NIIT)
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The NIIT is a 3.8% federal surtax on net investment income (such as dividends, interest, rental income, and capital gains) for individuals above certain MAGI thresholds. Specifically, the tax applies to the lesser of one’s net investment income or the amount by which MAGI exceeds $200,000 (single filers) or $250,000 (joint filers). In effect, high-net-worth investors with significant passive income streams – for example, income from real estate partnerships, REIT dividends, or sales of appreciated properties – may owe this additional 3.8% on those earnings if their MAGI crosses the threshold. The NIIT does not apply to income from active business operations (nor to tax-exempt income), but it captures passive real estate gains unless steps are taken (e.g. qualifying as a real estate professional for tax purposes or using 1031 exchanges to defer gains). For investors considering Lightstone’s private real estate offerings, it’s important to incorporate NIIT into after-tax return calculations. Lightstone’s emphasis on transparency and investor alignment would include providing tax information (like each investment’s income characterizations) so that HNW investors, in concert with their tax advisors, can plan for liabilities like the NIIT. Ultimately, while the NIIT slightly reduces net returns for affected investors, savvy planning (holding periods, loss harvesting, etc.) can help mitigate its impact as part of a comprehensive investment strategy.

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