Form 8960: Real Estate Investors’ Guide to Reporting Net Investment Income Tax

ByRandall Brody Expat Tax Forms
Form 8960

If you’re an American expat investing in real estate, whether in the U.S. or abroad, you’ve probably come across Form 8960. This form calculates the Net Investment Income Tax (NIIT), a 3.8% tax that applies to certain types of investment income. If you’re making money from rental properties, selling real estate, or earning dividends from real estate investments, this tax could affect you.

What Is Form 8960?

Form 8960 is how the IRS calculates NIIT, which was introduced in 2013 under the Affordable Care Act. This tax applies to high-income earners and targets passive income sources like rental profits, capital gains from property sales, and interest income. 

As an expat, you might already be dealing with tax exclusions and foreign tax credits, but those won’t always shield you from NIIT.  If your income goes over certain limits, you may have to pay this tax, and Form 8960 is how you report it.

Who Needs to File Form 8960?

You must file Form 8960 if your Modified Adjusted Gross Income (MAGI) exceeds:

  • $200,000 for single filers
  • $250,000 for married couples filing jointly
  • $125,000 for married couples filing separately

For example, if you’re an expat in Spain earning a salary that’s excluded under the Foreign Earned Income Exclusion but also making $50,000 from a rental in Texas, that rental income counts toward your MAGI. If it pushes you over the limit, you may owe NIIT.

What Counts as Net Investment Income?

For real estate investors, the IRS considers the following as net investment income:

  • Rental income (unless you qualify as a real estate professional)
  • Capital gains from selling properties
  • Interest from real estate loans
  • Dividends from Real Estate Investment Trusts (REITs)

If you’re simply collecting rental income while a property manager handles everything, that income is likely subject to NIIT. 

However, if you actively manage your properties and qualify as a real estate professional under IRS rules, your rental income may be exempt. To qualify, you must spend at least 750 hours per year managing properties and show active participation.

How Expats Can Be Affected

For expats, real estate investments across different countries make things more complicated. Owning rental property abroad doesn’t automatically subject you to NIIT, but the income it generates increases your MAGI. If you sell a U.S. property, you also have to consider the Foreign Investment in Real Property Tax Act (FIRPTA), which can withhold taxes upfront. Understanding how your global investments interact with U.S. tax laws is key to avoiding surprises.

How to Reduce Your NIIT Liability

While NIIT can be frustrating, there are ways to reduce its impact:

  1. Qualify as a Real Estate Professional: If you actively manage properties, you may be able to exclude rental income from NIIT.
  2. Use a 1031 Exchange: Deferring capital gains taxes by reinvesting in another property can help you avoid a big tax hit.
  3. Spread Out Gains Over Multiple Years: If possible, using an installment sale for a property can help keep your MAGI below the NIIT threshold.
  4. Offset Gains with Losses: If you sell a property at a gain, consider selling another asset at a loss to offset the taxable income.
  5. Contribute to Retirement Accounts: Contributions to tax-deferred accounts like IRAs or 401(k)s can help keep your MAGI below the NIIT threshold.
  6. Use Foreign Tax Credits: If you’re paying taxes on foreign investment income, you may be able to reduce your U.S. tax bill. However, NIIT is a separate tax and doesn’t always qualify for credits, so it’s best to check with a tax expert.

How Form 8960 Works

Let’s break down Form 8960 into simple steps, so it’s easier to follow. It has three sections, and each one builds on the last.

  1. Report Your Investment Income. If you earn money from rental properties, this is where you list it. That includes rent from a property in the U.S. or capital gains from selling real estate. If you earn interest or dividends from real estate investments, those go here too. You’ll find these numbers on Form 1040 or Schedule E if you report rental income.
  2. Deduct Related Expenses. Here, you subtract expenses tied to your investment income. This includes property taxes, mortgage interest, and maintenance costs. If you pay a property manager, their fees may also count. The key is that these expenses must be directly related to your investment income; personal expenses don’t qualify. Once you subtract these from your income, you get your net investment income.
  3. Calculate Your Tax. This is where you figure out how much tax you owe. You compare your net investment income to your MAGI (Modified Adjusted Gross Income) minus the IRS threshold for your filing status. The NIIT (Net Investment Income Tax) is 3.8% of the smaller amount.

Let’s say your net investment income is $30,000, and your MAGI is $260,000. If you’re married filing jointly, the IRS threshold is $250,000, so you subtract that from $260,000, leaving $10,000. Since $10,000 is less than $30,000, you pay 3.8% on $10,000, which comes out to $380. That’s the amount you report on your Form 1040.

For expats, tax deadlines are different. You have until June 15 instead of April 15, and if needed, you can file an extension until October 15 with Form 4868. But if you owe taxes, pay by April 15 to avoid interest and penalties.

File Form 8960 With Tax Samaritan

If you’re an expat investing in real estate, keep an eye on your MAGI. That’s what triggers NIIT and determines whether you need to file Form 8960. Planning ahead, whether by timing property sales, claiming deductions, or qualifying as a real estate professional, can help minimize your tax bill. And if you’re unsure how the rules apply to you, consult a tax expert who understands expat tax laws.

Plenty of expats have been caught off guard by NIIT. We’ve seen investors living abroad get hit with unexpected taxes on rental income from U.S. properties. Others have avoided NIIT entirely by structuring sales strategically. If you’re serious about real estate investing as an expat, take the time to understand how NIIT fits into your tax picture. A little planning now can save you a lot of money later.

If you need guidance on how NIIT impacts your real estate investments or help filing Form 8960, contact us to book a consultation. Our team of tax professionals specializes in expat tax matters and can help you make the best financial decisions for your situation.