By Hans Goldstein, founder, Retirement Literacy Foundation · Updated
Enrolled Agent, admitted to practice before the IRS.
The net investment income tax (NIIT, IRC Section 1411) adds 3.8% on top of capital gains tax once your income passes a threshold that has not changed since 2013. Many retirees never pay it until the year they sell a rental, land or a business. Then one sale pushes them over. Here is how it is calculated and what can change it.
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The rule
The tax is 3.8% of the smaller of (a) your net investment income or (b) the amount your modified adjusted gross income exceeds the threshold. It is figured on Form 8960. The thresholds below are set in the law and have not changed since 2013 (IRS, checked October 10, 2026).
| Filing status | MAGI threshold (not indexed for inflation) |
|---|---|
| Married filing jointly, qualifying surviving spouse | $250,000 |
| Single, head of household | $200,000 |
| Married filing separately | $125,000 |
Counts as net investment income: capital gains on rental, land and investment property, rents, interest (including interest on a seller-financed note), dividends, and income from passive businesses.
Generally does not count: wages, Social Security, IRA and 401(k) distributions (though they raise MAGI), gain excluded on a home sale under Section 121, and gain on business assets in a trade or business where you materially participate. Qualifying real estate professionals may be able to treat rental income as non-investment income (Treas. Reg. 1.1411-4(g)(7)).
Worked example
A married couple has $150,000 of other income and sells a rental with a $900,000 long-term gain.
| All in one year | Spread evenly over 10 years | |
|---|---|---|
| Gain reported per year | $900,000 | $90,000 |
| MAGI | $1,050,000 | $240,000 |
| Excess over $250,000 | $800,000 | $0 |
| NIIT | 3.8% × $800,000 = $30,400 | $0 a year, if other income stays the same |
Two cautions. Interest on a seller-financed note is itself investment income and raises MAGI. And if your income stays above the threshold every year, spreading the gain does not avoid the tax. It just pays it later. The result depends entirely on your income in each future year.
See the combined bill, NIIT included, with the capital gains tax calculator. For how spreading a sale works, see Form 6252 and the installment sale.
Before a sale
See whether your sale crosses the 3.8% line: one page from purchase price to gain, recapture, NIIT and state tax. Free from a 501(c)(3); nothing to buy.
The Retirement Literacy Foundation is a 501(c)(3) public charity (EIN 41-5062266). General education, not tax advice. We don’t sell financial products. We’ll email it to you. Unsubscribe any time.
$250,000 of modified adjusted gross income for married filing jointly, $200,000 for single and head of household, and $125,000 for married filing separately. These thresholds are not indexed for inflation and have not changed since 2013.
It is 3.8% of the smaller of your net investment income or the amount your MAGI exceeds the threshold, figured on Form 8960.
No, but they raise your MAGI, which can push investment income over the threshold. Wages, home-sale gain excluded under Section 121 and gain on a business where you materially participate also generally do not count.
Only if it keeps your MAGI under the threshold in each year. If your income stays above the threshold every year, spreading the gain just pays the tax later, and interest on a seller-financed note is itself investment income.
Audit trail
Reviewed for the Retirement Literacy Foundation, a 501(c)(3) education nonprofit. Prepared by Hans Goldstein, EA, retirement educator. Admitted to practice before the IRS. Informational only. Not tax, legal or investment advice. Every figure below cites its source so your CPA or attorney can check it.
Figures are 2026 federal and 2026 California amounts unless stated. Examples are illustrative, rounded, and assume no other income; your numbers will differ. Last reviewed October 10, 2026.
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Hans Goldstein is an Enrolled Agent, admitted to practice before the Internal Revenue Service. Not affiliated with or endorsed by the IRS.