The Net Investment Income Tax (NIIT) adds an additional 3.8% tax to income earned from passive activities. Real estate professionals routinely group activities as a tax saving strategy, but other industries are able to benefit as well. Because NIIT thresholds are fixed and not indexed for inflation, more taxpayers are finding themselves subject to the tax over time—making periodic review of activity groupings increasingly important.
For high-income taxpayers with multiple investment or real estate activities, how the IRS classifies those activities can have a meaningful impact on annual tax liability.
NIIT adds an additional 3.8% tax to income deemed “passive.” In certain situations, taxpayers may be able to group related activities to reduce NIIT exposure. However, because grouping elections are generally irrevocable, the decision requires careful analysis beyond the current tax year.
Understanding how grouping works – and when it helps versus hurts – is essential before making this election.
IRS Rules on Grouping Activities (Current 2026 Standards)
The IRS continues to allow grouping using any reasonable method, based on whether the combined operations form an “appropriate economic unit.” Treasury regulations identify five primary factors, unchanged in current law:
- Similarities and differences in types of trades or businesses
- Extent of common control
- Extent of common ownership
- Geographic location
- Interdependence among activities (e.g., shared services, customers, employees, or integrated operations)
Grouping is a widely used strategy for real estate professionals and taxpayers with multiple business or rental ventures, helping them meet material participation thresholds (most commonly the 500hour test under Reg. §1.4695T) so income is treated as nonpassive.
Regrouping Elections and NIIT
Although grouping elections are generally irrevocable, IRS rules continue to allow a onetime regrouping opportunity in the first taxable year in which the taxpayer becomes subject to the NIIT. Publication 925 (2024 ed., still current for 2025–2026 rules) confirms this NIIT triggered regrouping provision.
This provides taxpayers an opportunity to correct or modernize older groupings when NIIT exposure becomes relevant.
Why Caution Is Critical
Because grouping elections generally cannot be undone after made (except for the limited NIIT year regrouping exception), a decision to group activities should not be made solely for shortterm NIIT savings. Grouping affects:
- How passive losses are computed and suspended
- Whether future dispositions trigger large passive loss releases
- Active vs. passive characterization of income and deductions across entities
An election made today to avoid 3.8% NIIT could have an unintended negative long-term tax consequence, making proper planning with your tax advisor crucial.
Thresholds and NIIT Exposure (2025–2026)
The NIIT applies when both net investment income exists and MAGI exceeds fixed thresholds:
- $250,000 – Married filing jointly
- $200,000 – Single or head of household
- $125,000 – Married filing separately
These thresholds are unchanged for 2025/2026 and are not indexed for inflation, causing more taxpayers to fall into NIIT coverage over time.
If you have multiple business or rental activities, now is a good time to evaluate whether a grouping election—or NIIT year regrouping—can reduce your tax liability while still supporting your longterm planning strategy. Because grouping decisions can carry lasting implications, they should be made carefully and with a full view of both current law and future tax planning consequences.
Request a meeting with an Anders Tax advisor to determine whether a grouping or regrouping election could benefit your situation for the 2025–2026 filing cycles.