Net investment income tax (Form 8960) - How to handle rental real estate for NIIT?

The key for Form 8960 line 4b comes down to two critical questions: 1) Is your rental activity a Section 162 trade or business? and 2) Is it passive or non-passive to you? For commercial rentals managed actively like yours, you're right that they likely qualify as a Section 162 trade or business based on recent tax developments (especially after the Aragona Trust case). However, that's only half the equation. The more important factor is whether your activity is passive or non-passive. Unless you qualify as a real estate professional (which requires 750+ hours and more than half your working time in real estate activities), your rental activities are generally considered passive by default - regardless of how hands-on you are. This is different from the "active participation" standard used for the rental loss allowance. For your expenses like mortgage interest, property taxes, and repairs - these reduce your net rental income already before it flows to Form 8960. They're not separate adjustments on line 4b. As for investment advisor fees, these aren't considered directly connected to the production of investment income for NIIT purposes after the TCJA changes, so they wouldn't qualify for line 4b.

After struggling with something similar, I found an amazing tool called taxr.ai (https://taxr.ai) that actually helped me figure out my Form 8960 issues. Like you, I was managing commercial properties and couldn't figure out if I could exclude that income from NIIT. The tool analyzed my situation and showed me exactly how to handle line 4b based on my level of participation and business structure. It's basically an AI system that reviews your tax documents and clarifies these super complicated scenarios. What really helped was that it explained WHY certain income qualified for adjustments and others didn't. It also helped me understand how my specific situation fit into the real estate professional rules, which saved me thousands.

I was skeptical about taxr.ai but finally tried it with my rental property situation. I uploaded my Schedule E and last year's tax return, and it immediately identified that I was missing potential NIIT exclusions. Turns out I qualified as a real estate professional (I never knew the exact hour requirements before) and could actually adjust out most of my rental income on line 4b of Form 8960! The tool showed me exactly how to document my time to support this position if audited. It also explained that certain properties I managed more actively could be treated differently than others with less involvement. They had this case analysis feature that showed how my situation compared to relevant tax court decisions. Honestly wish I'd found this last year.

Have you tried calling the IRS directly? I was stuck on a similar NIIT question last year and spent WEEKS trying to get through to someone who actually understood Form 8960. After 7+ attempts and hours on hold, I found this service called Claimyr (https://claimyr.com) that got me through to an actual IRS agent in about 15 minutes. You can see how it works here: https://youtu.be/_kiP6q8DX5c The agent walked me through the exact criteria for section 162 trade or business determination for rental properties and explained how to properly document my participation to support my position on Form 8960. Saved me so much stress and potentially thousands in taxes. They have real specialists who understand these technical forms, not just general tax help.

I have to eat my words about Claimyr. After my skeptical comment, I decided to try it myself since I was getting nowhere with my Form 8960 questions. Got connected to an IRS tax law specialist in about 20 minutes (after weeks of failing to get through on my own). The specialist explained that for my commercial properties, I needed to look at the Groetzinger standard (which I'd never heard of) to determine if my rentals qualified as a Section 162 business. She walked me through how to document my activities to support treating some properties as businesses rather than just investments. She also clarified that even though my activities were likely passive under Section 469 rules, I could still potentially qualify some properties as Section 162 businesses - they're separate tests! This one call probably saved me around $7,000 in NIIT. Completely changed my understanding of Form 8960 line 4b.

Here's a practical approach that worked for me with a similar Form 8960 situation: Document EVERYTHING about your rental activities. Keep a detailed log of hours, tasks, decisions made, etc. If you can demonstrate continuous, regular, and substantial activity in your rental business, you have a stronger case for Section 162 trade or business status. For line 4b specifically, I found that the key is proving your rental rises to the level of a trade or business (using the Groetzinger standard mentioned by someone else - continuity and regularity with profit motive) while ALSO addressing the passive activity rules. They're related but separate tests.

I know everyone's focused on the passive vs. non-passive aspect, but don't forget to check if you're subject to NIIT in the first place. The 3.8% NIIT only kicks in if your modified adjusted gross income (MAGI) exceeds $200k (single) or $250k (married filing jointly). Also, regardless of your activity level, if your rentals are generating losses, those won't increase your NIIT (though passive losses can only offset passive income). And if your properties are heavily mortgaged with depreciation, you might not even have net income to worry about for NIIT purposes.

The complexity you're facing with Form 8960 is incredibly common, and you're asking all the right questions. Based on your description of actively managing commercial properties through your LLC, you're in a gray area that requires careful analysis. Here's my take: Your rental activities likely DO qualify as a Section 162 trade or business under the Groetzinger standard (regular, continuous activity with profit motive), especially given your hands-on management approach. However, the passive activity determination is separate and more restrictive. For line 4b adjustments, you can only reduce NIIT for income from trades or businesses that are NOT passive activities. Unless you qualify as a real estate professional (750+ hours annually in real estate activities AND more than half your total working time), your rentals remain passive regardless of your involvement level. The expenses you mentioned (mortgage interest, taxes, repairs) already reduce your Schedule E income before it flows to Form 8960 - they're not additional line 4b adjustments. Your investment advisor fees also don't qualify for line 4b treatment under current rules. My recommendation: Start documenting your time and activities meticulously NOW. Track every hour spent on property management, tenant relations, maintenance coordination, etc. If you can demonstrate you meet the real estate professional thresholds, you could potentially exclude significant rental income from NIIT through line 4b adjustments. Consider consulting with a tax professional who specializes in NIIT and real estate taxation - this area has evolved significantly with recent court cases and the stakes are high enough to justify expert guidance.

The confusion you're experiencing with Form 8960 is completely understandable - this is one of the most complex areas of tax law right now. Let me break down your situation based on what you've described. Your commercial rental properties managed through your single-member LLC likely DO qualify as a Section 162 trade or business under current case law, especially given your hands-on involvement. The Groetzinger standard looks at whether you're engaged in regular, continuous activity with a profit motive - which clearly describes your situation. However, here's the critical distinction that trips up many taxpayers: qualifying as a Section 162 business and being "non-passive" are two separate determinations. For Form 8960 line 4b adjustments, you need BOTH conditions to be met. Unless you can qualify as a real estate professional (750+ hours annually in real estate activities AND it represents more than half your total working time), your rental activities will be treated as passive regardless of how actively you manage them. This is different from the "active participation" standard used for the $25,000 rental loss allowance. Your expenses (mortgage interest, property taxes, maintenance) already reduce your net rental income on Schedule E before it flows to Form 8960 - these aren't separate line 4b adjustments. Similarly, investment advisor fees don't qualify for line 4b treatment under current NIIT regulations. My advice: Start meticulously documenting your real estate activities immediately. Track every hour spent on tenant management, property maintenance coordination, market research, financial analysis, etc. If you can demonstrate you meet the real estate professional thresholds, you could potentially exclude significant rental income from NIIT through line 4b. Given the complexity and potential tax savings involved, consulting with a tax professional who specializes in NIIT and real estate taxation would be a wise investment.