Tax Facts

8643 / What is “net gain” with respect to the disposition of property and net investment income?

Pursuant to IRC Section 1411(c)(1)(A)(iii), “net gain” attributable to the disposition of property is included in net investment income. Significantly, the term “net gain” means dispositions of property that trigger gain and are netted against “losses” generated in those same types of dispositions. Similar to regular income taxation, only taxable gains and non-deductible losses are considered. Thus, because the gain must be “recognized” for income tax purposes, dispositions of property that are income tax-free are also net investment income tax-free. Examples of such tax-free gains include but are not limited to like-kind exchanges under IRC Section 1031 (see Q 8664 to Q 8686) and involuntary conversions (see Q 8664 to Q 8673).1


Although the term “net gain” means that the gains and losses described above have been netted, as discussed in Q 8648, gain attributable to the disposition of property held by a trade or business in which the taxpayer materially participates (i.e., non-passive gains, except gains derived from a trade or business that involves trading in financial instruments and commodities) is excluded from net investment income. In other words, the following are true:
Net gain recognized from the disposition of property held in a trade or business in which the taxpayer materially participates is not included in net investment income.

Net gain recognized from the disposition of property held in a trade or business in which the taxpayer does not materially participate is included in net investment income.

Net gain recognized from the disposition of investment property (where no trade or business is involved) is always included in net investment income.

Net gain recognized from the disposition of any property held by a business engaged in trading financial instruments or commodities (regardless of the taxpayer’s participation in the business) is always included in net investment income.

See Q 8644 for a discussion of how net investment income gains are netted against net investment income losses.





1.  Treas. Reg. §§ 1.1411-4(a)(1)(iii), 1.1411-4(d) (see examples).


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