The Net Investment Income Tax (NIIT) adds a 3.8% surtax on top of your ordinary income and capital gains taxes if you earn above certain thresholds. For short-term rental owners, NIIT interacts with rental income — and with bonus depreciation — in ways that are easy to misunderstand. This article explains how the tax works and how STR-related deductions affect it.

What Is NIIT?

The Net Investment Income Tax, established by the Affordable Care Act (§1411 of the Internal Revenue Code), is a 3.8% surtax applied to the lesser of:

Your net investment income (NII), or
The amount by which your Modified Adjusted Gross Income (MAGI) exceeds the applicable threshold.

The 2025 thresholds (not indexed for inflation since enactment) are:

Married Filing Jointly: $250,000
Single / Head of Household: $200,000
Married Filing Separately: $125,000

What Counts as Net Investment Income?

Net investment income broadly includes interest, dividends, capital gains, annuities, royalties, and passive rental income. The key word is passive: whether your STR rental income is subject to NIIT depends on whether you materially participate in the activity.

STR income and NIIT: the participation test

If your STR activity is passive — meaning you do not meet any of the seven material participation tests for the year — your net rental income falls into NII and is subject to the 3.8% surtax.

If you materially participate in your STR (most commonly by meeting the 500-hour test or the STR exception: average guest stay ≤7 days and you participate more than 100 hours), the activity is non-passive. Non-passive rental income is generally excluded from NII — it is subject to ordinary income tax instead, without the additional 3.8% layer.

The IRS position on whether STR activities treated as non-passive under the STR exception also escape NIIT is nuanced. In most cases, material participation removes the income from the NIIT basket — but the interaction with self-employment tax and NIIT can produce unexpected results. Confirm with a CPA for your specific situation.

How Bonus Depreciation Affects NIIT

Here is where STR investing intersects with NIIT in a meaningful way. Bonus depreciation generates large deductions in the year you place property in service. If your STR activity is non-passive, those depreciation deductions reduce your ordinary income MAGI, which in turn can reduce or eliminate your NIIT exposure on other investment income.

Illustrative Assumptions

Filing status: Married filing jointly | MAGI before STR: $380,000

Long-term capital gains: $40,000 (passive, subject to NIIT)

STR: non-passive activity, year-1 bonus depreciation deduction: $160,000

Illustrative — not a tax projection for any individual

Without the STR depreciation deduction (illustrative):

MAGI: $380,000
Excess above $250,000 threshold: $130,000
NII: $40,000 (LTCG)
NIIT base: lesser of $130,000 and $40,000 = $40,000
NIIT owed: $40,000 × 3.8% = $1,520

With the STR depreciation deduction (illustrative, non-passive activity):

MAGI after STR deduction: $380,000 − $160,000 = $220,000
Below the $250,000 threshold
NIIT owed: $0

In this example, a non-passive STR depreciation deduction of $160,000 reduces MAGI below the NIIT threshold entirely — eliminating the surtax on capital gains that would otherwise apply. The effect is additive to the ordinary income tax savings the depreciation already generates.

This example is illustrative only. The actual interaction depends on your income composition, activity classification, and whether deductions are limited by Passive Activity Loss rules or at-risk rules. Do not rely on this example for tax planning without professional guidance.

Passive STR Activities and NIIT

If your STR is passive — you do not materially participate — the picture is different. Net rental income is included in NII. But so are passive losses: the NIIT regulations allow passive activity losses (to the extent they offset passive income on your return) to reduce your NII. Suspended passive losses released upon sale of the property also generally reduce NII in the year of sale.

In practice, a passive STR generating a net loss (after depreciation) may have little or no NII to tax in a given year — but the loss is suspended under PAL rules and cannot offset your W-2 income. The NIIT benefit of the loss is deferred alongside the income tax benefit.

NIIT and the STR Calculator

The STR Benefit Calculator models NIIT as part of the full federal tax picture. When you enter your income, filing status, and investment income alongside STR inputs, the Tax Impact section shows NIIT alongside ordinary income and FICA. Toggling between active material participation and passive scenarios illustrates how classification affects the surtax. See also the material participation article for how to qualify for non-passive treatment.

Key Takeaways

NIIT adds 3.8% on net investment income for MAGI above $250,000 (MFJ) or $200,000 (single).
Passive STR net income is subject to NIIT; non-passive STR income is generally not.
Non-passive STR bonus depreciation can reduce MAGI and potentially eliminate NIIT exposure on other investment income.
Passive losses from an STR can reduce NII (to the extent they offset passive income), but suspended losses provide no current NIIT benefit until they are released.

This article is educational and does not constitute tax, legal, or financial advice. Tax treatment depends on individual facts and circumstances, including activity classification, income levels, and applicable law. Consult a licensed CPA or tax attorney before making investment or tax decisions.

NIIT and Short-Term Rentals: How the 3.8% Surtax Intersects with STR Depreciation