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Real estate pros are filers who spend over 50% of their working hours and 750 or more hours a year materially participating as a developer, broker, etc.
But IRS gives them a safe harbor to avoid the tax. Newly finalized regulations provide that the 3.8% tax won't apply to a real estate professional's net rental income if it is derived from a trade or business. Because that term is nebulous, the IRS says a real estate pro who participates more than 500 hours a year in rental activities will meet this test.
Alternatively, the taxpayer can qualify if he or she has participated in rental activities for more than 500 hours a year in five out of the last 10 years.
Taxpayers who don't meet the 500-hour test aren't necessarily out of luck. But they will have to show that they are doing more than just routine maintenance and collecting the rent, such as participating in the day-to-day decision making.
Remember, the surtax hits net investment income of couples with modified AGIs over $250,000 and single taxpayers with modified AGIs in excess of $200,000.