IRS Form 8960, Net Investment Income Tax— Individuals, Estates, and Trusts instructions explained by rental real estate CPA

I’m a rental real estate CPA because there are rental properties in my extended family. Sometimes I get new rental property clients because the Schedule E instructions are difficult to understand. Schedule E instructions list 13 additional IRS tax forms you may have to file along with Schedule E, Supplemental Income and Loss. IRS Form 8960, Net Investment Income Tax— Individuals, Estates, and Trusts, new in 2013, is one of those potential additional tax forms.. A few new Clients in 2014 stated their tax software didn’t support Form 8960. Most taxpayers with rental property never use Form 8960, at least for their rental property. Why? Most landlords operate rental property at a loss because of the depreciation allowed.

IRS Form 8960 Instructions, Net Investment Income Tax— Individuals, Estates, and Trusts

Form 8960 spouts 20 pages of instructions filled with acronyms, treasury regulations and odd nomenclature. All for a single page tax form. Even I got bored reading them. Very dry. Form 8960 is a typical IRS tax form:

• It applies to multiple types of tax returns, in this case the familiar Form 1040 and Form 1041.
• There are three parts.
• It also applies to many non rental real estate issues.
• It first calculates a total income figure.
• Form 8960 then invokes modification of the total investment income.
• Finally it chooses the lesser of two separate calculations for the tax due.

IRS Form 8960 Instructions, Net Investment Income Tax— Individuals, Estates, and Trusts - Part I Investment Income

Part I reports passive income received during the tax year. Rental property profit or loss is considered passive. Rental profit gets reported on line 4a of Form 8960.But taxable interest, royalties, pass through passive income from S Corporations and Partnerships are all included on 4a as well. Then 8960 makes adjustments for certain issues. Finally it renders a Total Investment Income figure on line 8.

IRS Form 8960 Instructions, Net Investment Income Tax— Individuals, Estates, and Trusts - Part II Investment Expenses Allocable to Investment Income and Modifications

Part II has no bearing on rental property investment income. All modifications already took place on Schedule E.

IRS Form 8960 Instructions, Net Investment Income Tax— Individuals, Estates, and Trusts - Part III Tax Computations

The tax is 3.8% of the lesser of your rental property profit, assuming you had no other qualifying investment income, or your excess Modified Adjusted Gross Income (MAGI). MAGI requires a calculation but then you get to deduct a threshold amount. Most taxpayers don’t have MAGI after the deduction.

Much of our client base is rental property Folks, usually filing Schedule E to report their rental income and expenses. In 2014, sadly, we still had many rental property short sales, foreclosures, etc., from the Recession. So we dealt with cancelled debt on Form 1099-C by using IRS Form 982, Reduction of Tax Attributes. We handled numerous Form 1099-A(s) as well. Remember 2014 starts the application of new IRS rules on what qualifies as a repair versus a capital expense.

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