Modeling how much cash you'll keep AFTER paying taxes is wildly underrated. You assume it's 20% on real estate but what if it's not.

And when you're doing math on multiple millions, a 3.8% tax can move the needle quickly. On a $5,000,000 exit, that's $190,000 of extra tax burn.

Today, we're talking about a favorite topic of mine - how to avoid the net investment income tax (NIIT). ⤵️

What is NIIT

Essentially it's a 3.8% tax on passive income. It was rolled out to help fund the Affordable Care Act (ACA) under the Obama administration and still keeps biting unsuspecting SMB and real estate owners.

It hits when your income (MAGI) rises over $250k and you have passive-type investment income.

What Income it Hits

Includable income are things you'd expect on passive investment income - interest, dividends, capital gains from marketable securities, etc. But it can also include passive business income and rental income.

And it's that last piece that comes back to eat away at those precious post-tax returns on investment.

If you're a passive investor in a business or private real estate, and you're over the income limits, your income is getting taxed by the net investment income tax and you have an additional 3.8% tax you're paying to fund the ACA.

Charge it to the game if that's you - but many unsuspecting business owners and real estate operators are accidentally paying this tax every year.

Who is Paying This That Shouldn't Be

Two times I see this mistakenly paid most often:

1. Business owners with multiple LLCs, especially in years of a sale
2. Real estate GPs and operators

Business Owners

When you split your business activities between entities for legal protection, your tax pro needs to watch for an election to aggregate those activities for income tax purposes.

This aggregation tells the IRS, "hey man, this is just for legal purposes - treat these as one activity for tax purposes." Without it, the IRS looks at them as separate businesses and will generally see you as "active" only in one of them.

And to avoid this 3.8% NIIT, you need to be "active" per the definition of the IRS.

Real Estate GPs

As real estate professionals, you have an even better aggregation to make to pull together all your rental activities and make them not passive by default. This means all that hard earned NOI isn't tagged with additional tax it shouldn't be.

Operating Income is One Thing, a Sale Adds Up Faster

When I see a return in a sale year - be it a business exit or property sale - I go to the 1040 Line 23 "Other Taxes." 👈 That's where NIIT hides out. It flows there from Form 8960 - and if it's the business owner or real estate GP, I look for a "back out" of the gain from capital gains of the sale of those assets.

Maybe 50% of the time it's not excluded and the seller has overpaid tax. As per the math in the intro - it easily gets into the hundreds of thousands of dollars. And it's not missed deductions - it's straight tax gone. Poof.

The Takeaway

The setup to avoid this tax begins years before the exit year - you need aggregation elections if you're a SMB or a real estate professional to support this treatment. But if you've done your homework, make sure you don't lose that extra post-tax IRR you worked for.

Obviously if you are a passive investor, you're stuck with it - blame Obama. Only joking. It is what it is. 🤷‍♂️

On the positive side, if you have overpaid this in open tax years (mostly 2023 and forward) - you can go back and amend to get a refund.

If you have had a successful exit and want a second set of eyes on your returns, just reach out.

🫡

Group Chat Worthy Posts 🔥📲

It's been 25 years since the attacks on 9/11. And I still get chills when I think about the countless acts of heroism that day and the days following. Unfortunately, most of those selfless acts will never be known. But what is known is that the people of New York are incredible Americans. Never forget.

Brain Leakage @BrainLeakage03 Since you weren’t even born yet, I’m going to answer in good faith: 9/11 was America’s collective loss of innocence. In the decades prior, we’d won the Cold War by outspending the Soviets. We were the sole remaining superpower, and we were in a period of peace and economic https://twitter.com/fudgefuturistic/status/2095925797898903675 Futuristic_Fudge @FudgeFuturistic People born pre-9/11 have such a weird, worshipful attitude about it. https://twitter.com/MonkeyWithGuns/status/2095579315203420661 1:58 PM • Sep 7, 2026 4206 Retweets 34497 Likes Read 918 replies

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Barnaby Breaks History 🇺🇸 @BarnabyHistory 🇺🇸 The Boatlift That Was Bigger Than Dunkirk At 10:45 a.m. on September 11, 2001, a Coast Guard lieutenant named Mike Day keyed a radio in New York Harbor and said the only sentence that mattered. “All available boats. This is the United States Coast Guard. Anyone wanting to 9:0 PM • Sep 7, 2026 5997 Retweets 29083 Likes Read 550 replies

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Fayston_Frank @TheRealFayston The Falling Man. 9/11. He chose the window over the flames. That photo should never leave us — not out of hate, but out of resolve. Never forget what evil did that day. Never forget the 2,977. Never forget who declared war on us, and never let America grow complacent about 11:12 PM • Sep 6, 2026 2657 Retweets 8881 Likes Read 325 replies

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Mike Bales 🫡🇺🇸 @MikeBales FDNY Firefighter Gary Box, Squad 1. On 9/11 he ran through the Brooklyn-Battery Tunnel toward the World Trade Center after his truck was stuck in traffic. Last photo of him. Remains never recovered. Family found this picture almost nine years later. A hero. Tell your kids. This 11:34 AM • Sep 4, 2026 2781 Retweets 10599 Likes Read 261 replies

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B’s Spin🐝 @BsSpin He was 32 years old, on a business trip, with a pregnant wife and two little boys waiting for him at home. On September 11, 2001, Todd Beamer boarded United Flight 93, headed from Newark to San Francisco. He was supposed to come home to his family. Instead, he became part of a 11:50 AM • Sep 7, 2026 2520 Retweets 18632 Likes Read 280 replies

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