Question on tax implications and what needs to be done

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xrayvsn
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Question on tax implications and what needs to be done

Post by xrayvsn » Tue May 14, 2019 9:53 am

I have been extremely fortunate to get in on the ground floor of my medical building when I bought shares in I believe 2007.

We are about to complete a sale of said property and essentially I am going to be hit with a massive tax bill via capital gains. The people selling the building (and the company purchasing the building) have structured the sale as sale of stock of the company that owns the building. The rationale, as I was explained, was so that the proceeds would be treated as capital gains where it tops out at 20% tax rate (I also believe the 3.8% surcharge is not applicable but not sure what the rationale was behind that (I think because we are continuing to rent it out and it is self rental maybe?). [If anyone knows what the real reason is I would be grateful]

I stand to make a 7 figure profit (no longer have any basis as it has already exceeded my original investment via distribution payouts). So I am looking at a $200k+ tax bill.

My question is do I have to submit this tax now as a quarterly estimated payment or can I wait until filing next year and then owe a massive amount of tax then (my preferred method).

And if I do a quarterly tax payment, since it is the 2nd quarter do I have to put in 50% of the tax bill by June deadline or just 25%?

And once I start quarterly payments, am I forced to this in future tax years or can I revert back to my current wait till 4/15 method (which I hope is the case because I do not want to estimate taxes quarterly).

This is a one off type tax event and don't expect it to happen in the future.

Thanks for any advice on this.

mhalley
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Re: Question on tax implications and what needs to be done

Post by mhalley » Tue May 14, 2019 3:36 pm

IANAL or CPA. My understanding is that taxes are due when the money is made, and not paying the quarterly taxes could result in a penalty. I would just pay the taxes divided evenly over the next estimated payments. If this is a singular event, you can go back to your previous method of tax payments. Why isn’t your cpa helping with this?
Gratz on the sale!
https://www.irs.gov/pub/irs-pdf/p505.pdf
Last edited by mhalley on Tue May 14, 2019 3:46 pm, edited 1 time in total.

Gill
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Re: Question on tax implications and what needs to be done

Post by Gill » Tue May 14, 2019 3:41 pm

You should look carefully at the safe harbor rules which permit you to pay an amount equal to your 2018 tax in equal quarterly installments if your AGI was less than $150,000 or 110% of that amount if greater than $150,000. If you fall under those provisions you can then pay the balance in April 2020.

Are you subject to withholding? If so, there are other alternatives you could use such as having enough withheld in
December to equal your 2018 tax or 110% of your 2018 tax and then pay the balance in 2019 without any need to make estimated payments.

I am stabbing in the dark a bit without knowing your full picture.
Gill
Last edited by Gill on Wed May 15, 2019 6:00 am, edited 3 times in total.
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

mhalley
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Re: Question on tax implications and what needs to be done

Post by mhalley » Tue May 14, 2019 3:49 pm

You would have to have a nice income if 7 additional figures doesn't make you ineligible for the safe harbor. :beer

kaneohe
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Re: Question on tax implications and what needs to be done

Post by kaneohe » Tue May 14, 2019 4:36 pm

mhalley wrote:
Tue May 14, 2019 3:49 pm
You would have to have a nice income if 7 additional figures doesn't make you ineligible for the safe harbor. :beer
not sure I understand........isn't everyone eligible for prior yr safe harbor as long as you pay enough in timely fashion?

mhalley
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Re: Question on tax implications and what needs to be done

Post by mhalley » Tue May 14, 2019 5:18 pm

Perhaps I phrased it wrong. Paying any extra on the 1 million should certainly make op safe.

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xrayvsn
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Re: Question on tax implications and what needs to be done

Post by xrayvsn » Tue May 14, 2019 6:44 pm

mhalley wrote:
Tue May 14, 2019 3:36 pm
IANAL or CPA. My understanding is that taxes are due when the money is made, and not paying the quarterly taxes could result in a penalty. I would just pay the taxes divided evenly over the next estimated payments. If this is a singular event, you can go back to your previous method of tax payments. Why isn’t your cpa helping with this?
Gratz on the sale!
https://www.irs.gov/pub/irs-pdf/p505.pdf
Thanks. Actually for the past 2 years I have been doing my taxes myself (H&R block software) because my cpa had not done anything over the standard deductions (debt free so my taxes are fairly simple these days with the exception of this one event) . But maybe I need to reach out again regarding this event.

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xrayvsn
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Re: Question on tax implications and what needs to be done

Post by xrayvsn » Tue May 14, 2019 6:51 pm

Gill wrote:
Tue May 14, 2019 3:41 pm
You should look carefully at the safe harbor rules which permit you to pay an amount equal to your 2018 tax in equal monthly installments if your AGI was less than $150,000 or 110% of that amount if greater than $150,000. If you fall under those provisions you can then pay the balance in April 2020.

Are you subject to withholding? If so, there are other alternatives you could use such as having enough withheld in
December to equal your 2018 tax or 110% of your 2018 tax and then pay the balance in 2019 without any need to make estimated payments.

I am stabbing in the dark a bit without knowing your full picture.
Gill

Thanks Gill. I am a physician and my income does put me on the high income earner tax treatment side. So my 2018 tax as long as I have withheld enough for 110% of that value I should be able to keep the money until 4/15 and then pay the balance then? That would be perfect.

I am a w2 earner and have claimed 0 deductions (max withheld). I end up owing money 4/15 because of side income streams etc but don't have to pay a penalty because I typically have put in over 90% of what I owe already (I know you get a penalty if you owe more than 10% of the total amount).

If I do this method I would have to pay closer attention because doing 110% of 2019 taxes will be overpaying the 2020 return.

If I do the December top off withholding you suggest I won't get penalizes for not doing it equal monthly installments?

Gill
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Re: Question on tax implications and what needs to be done

Post by Gill » Tue May 14, 2019 6:59 pm

xrayvsn wrote:
Tue May 14, 2019 6:51 pm
.
If I do the December top off withholding you suggest I won't get penalizes for not doing it equal monthly installments?
That’s correct. As long as you pay in through withholding an amount at least equal to your 2018 tax you are fine and can then pay the balance in April 2020. It doesn’t matter when it’s paid during the year. Monitor this closely and then cut back the withholding to normal levels next January. This should be a good solution for you and no need to make estimated payments.
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

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xrayvsn
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Re: Question on tax implications and what needs to be done

Post by xrayvsn » Tue May 14, 2019 9:24 pm

Thank you so much Gill. I think that is the strategy I am going to employ

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WoodSpinner
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Re: Question on tax implications and what needs to be done

Post by WoodSpinner » Tue May 14, 2019 10:07 pm

Gill wrote:
Tue May 14, 2019 6:59 pm
xrayvsn wrote:
Tue May 14, 2019 6:51 pm
.
If I do the December top off withholding you suggest I won't get penalizes for not doing it equal monthly installments?
That’s correct. As long as you pay in through withholding an amount at least equal to your 2018 tax you are fine and can then pay the balance in April 2020. It doesn’t matter when it’s paid during the year. Monitor this closely and then cut back the withholding to normal levels next January. This should be a good solution for you and no need to make estimated payments.
Gill
Just a quick check...

If I am NOT a W2 earner and pay Estimated taxes, am I correct that the 110% of last year’s tax bill is a Safe Harbor? (AGI over $150,000).

Thanks in advance

WoodSpinner

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FiveK
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Re: Question on tax implications and what needs to be done

Post by FiveK » Tue May 14, 2019 11:15 pm

WoodSpinner wrote:
Tue May 14, 2019 10:07 pm
Gill wrote:
Tue May 14, 2019 6:59 pm
xrayvsn wrote:
Tue May 14, 2019 6:51 pm
.
If I do the December top off withholding you suggest I won't get penalizes for not doing it equal monthly installments?
That’s correct. As long as you pay in through withholding an amount at least equal to your 2018 tax you are fine and can then pay the balance in April 2020. It doesn’t matter when it’s paid during the year. Monitor this closely and then cut back the withholding to normal levels next January. This should be a good solution for you and no need to make estimated payments.
Gill
Just a quick check...

If I am NOT a W2 earner and pay Estimated taxes, am I correct that the 110% of last year’s tax bill is a Safe Harbor? (AGI over $150,000).

Thanks in advance

WoodSpinner
No. Withholding get a much better deal.

If, however, you make identical and timely quarterly estimated payments then that gets treated much the same as withholding. See page 2 of https://www.irs.gov/pub/irs-pdf/f2210.pdf.

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FiveK
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Re: Question on tax implications and what needs to be done

Post by FiveK » Tue May 14, 2019 11:21 pm

Gill wrote:
Tue May 14, 2019 3:41 pm
You should look carefully at the safe harbor rules which permit you to pay an amount equal to your 2018 tax in equal monthly installments....
The way Form 2210 defines "quarters" will cause "equal monthly" payments not to be "the same amount of estimated tax on each of the four payment due dates."

No need - and it can be harmful - to make 12 estimated payments.

Gill
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Re: Question on tax implications and what needs to be done

Post by Gill » Wed May 15, 2019 5:59 am

FiveK wrote:
Tue May 14, 2019 11:21 pm
Gill wrote:
Tue May 14, 2019 3:41 pm
You should look carefully at the safe harbor rules which permit you to pay an amount equal to your 2018 tax in equal monthly installments....
The way Form 2210 defines "quarters" will cause "equal monthly" payments not to be "the same amount of estimated tax on each of the four payment due dates."

No need - and it can be harmful - to make 12 estimated payments.
Whoops! I meant quarterly, of course. Sorry, misspoke...
Gill
Cost basis is redundant. One has a basis in an investment | One advises and gives advice | One should follow the principle of investing one's principal

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WoodSpinner
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Re: Question on tax implications and what needs to be done

Post by WoodSpinner » Wed May 15, 2019 8:31 am

FiveK wrote:
Tue May 14, 2019 11:15 pm
WoodSpinner wrote:
Tue May 14, 2019 10:07 pm
Gill wrote:
Tue May 14, 2019 6:59 pm
xrayvsn wrote:
Tue May 14, 2019 6:51 pm
.
If I do the December top off withholding you suggest I won't get penalizes for not doing it equal monthly installments?
That’s correct. As long as you pay in through withholding an amount at least equal to your 2018 tax you are fine and can then pay the balance in April 2020. It doesn’t matter when it’s paid during the year. Monitor this closely and then cut back the withholding to normal levels next January. This should be a good solution for you and no need to make estimated payments.
Gill
Just a quick check...

If I am NOT a W2 earner and pay Estimated taxes, am I correct that the 110% of last year’s tax bill is a Safe Harbor? (AGI over $150,000).

Thanks in advance

WoodSpinner
No. Withholding get a much better deal.

If, however, you make identical and timely quarterly estimated payments then that gets treated much the same as withholding. See page 2 of https://www.irs.gov/pub/irs-pdf/f2210.pdf.
Thanks... Fortunately that is my plan, equal payments to 110% of last year’s taxes. FYI, California payments are different :shock: !

30% Q1
40% Q2
0% Q3
30% Q4

This caused a small penalty last year.

WoodSpinner.

kaneohe
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Re: Question on tax implications and what needs to be done

Post by kaneohe » Wed May 15, 2019 9:00 am

FiveK wrote:
Tue May 14, 2019 11:21 pm
Gill wrote:
Tue May 14, 2019 3:41 pm
You should look carefully at the safe harbor rules which permit you to pay an amount equal to your 2018 tax in equal monthly installments....
The way Form 2210 defines "quarters" will cause "equal monthly" payments not to be "the same amount of estimated tax on each of the four payment due dates."

No need - and it can be harmful - to make 12 estimated payments.
good point! I guess not many would make monthly payments but if they did, wouldn't they be ok if they paid each by mid-month?
and even if they paid at month end, wouldn't the penalty be minimal since you were only 2 wks late for half of the quarter payments?

Greenman72
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Re: Question on tax implications and what needs to be done

Post by Greenman72 » Wed May 15, 2019 9:21 am

Gill wrote:
Tue May 14, 2019 3:41 pm
You should look carefully at the safe harbor rules which permit you to pay an amount equal to your 2018 tax in equal quarterly installments if your AGI was less than $150,000 or 110% of that amount if greater than $150,000. If you fall under those provisions you can then pay the balance in April 2020.
+1

Also, I would look into a Delaware Statutory Trust for the money, if you haven't sold it yet. It can (kinda) substitute for a fixed-income or REIT holding in your portfolio.

https://www.kiplinger.com/article/real- ... a-dst.html

https://www.kiplinger.com/article/inves ... rusts.html

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FiveK
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Re: Question on tax implications and what needs to be done

Post by FiveK » Wed May 15, 2019 11:27 am

kaneohe wrote:
Wed May 15, 2019 9:00 am
FiveK wrote:
Tue May 14, 2019 11:21 pm
Gill wrote:
Tue May 14, 2019 3:41 pm
You should look carefully at the safe harbor rules which permit you to pay an amount equal to your 2018 tax in equal monthly installments....
The way Form 2210 defines "quarters" will cause "equal monthly" payments not to be "the same amount of estimated tax on each of the four payment due dates."

No need - and it can be harmful - to make 12 estimated payments.
good point! I guess not many would make monthly payments but if they did, wouldn't they be ok if they paid each by mid-month?
and even if they paid at month end, wouldn't the penalty be minimal since you were only 2 wks late for half of the quarter payments?
It might work out ok because there would be 4 payments in the first quarter, thus putting one ahead of the game.

MarkNYC
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Re: Question on tax implications and what needs to be done

Post by MarkNYC » Wed May 15, 2019 8:30 pm

xrayvsn wrote:
Tue May 14, 2019 9:53 am
I have been extremely fortunate to get in on the ground floor of my medical building when I bought shares in I believe 2007.

We are about to complete a sale of said property and essentially I am going to be hit with a massive tax bill via capital gains. The people selling the building (and the company purchasing the building) have structured the sale as sale of stock of the company that owns the building. The rationale, as I was explained, was so that the proceeds would be treated as capital gains where it tops out at 20% tax rate (I also believe the 3.8% surcharge is not applicable but not sure what the rationale was behind that (I think because we are continuing to rent it out and it is self rental maybe?). [If anyone knows what the real reason is I would be grateful]

I stand to make a 7 figure profit (no longer have any basis as it has already exceeded my original investment via distribution payouts). So I am looking at a $200k+ tax bill.
It is not clear why the gain would not be subject to the 3.8% Net Investment Income Tax. I assume the building was owned by an S Corporation and you owned stock in the S Corp. If so, what % of the S Corp stock did you own, and did you materially participate in the operation of the S Corp activities? Also, was the S Corp your employer?

If you did not materially participate in the S Corp operations then the activity is passive for you (regardless of any self-rental) and
the gain would be subject to the NII tax.

There may be other unstated relevant facts, but it might be worthwhile to consult a tax professional so you have a clear understanding as to why the gain on the sale of the stock should or should not be subject to the 3.8% NII tax.

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xrayvsn
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Re: Question on tax implications and what needs to be done

Post by xrayvsn » Thu May 16, 2019 9:08 am

[/quote]
It is not clear why the gain would not be subject to the 3.8% Net Investment Income Tax. I assume the building was owned by an S Corporation and you owned stock in the S Corp. If so, what % of the S Corp stock did you own, and did you materially participate in the operation of the S Corp activities? Also, was the S Corp your employer?

If you did not materially participate in the S Corp operations then the activity is passive for you (regardless of any self-rental) and
the gain would be subject to the NII tax.

There may be other unstated relevant facts, but it might be worthwhile to consult a tax professional so you have a clear understanding as to why the gain on the sale of the stock should or should not be subject to the 3.8% NII tax.
[/quote]


The property was a single property created as an S corp. I would be considered a passive investor during the majority of this holding (9 years) although for 1 year I was elected and served as a member of the board of directors.

From what I understand the entity that is buying the property agreed to do it as a stock sale. I am not sure the rationale for avoiding the 3.8% surcharge myself but the CFO had mentioned it (I will send him out a message and hopefully post his response).

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xrayvsn
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Re: Question on tax implications and what needs to be done

Post by xrayvsn » Thu May 16, 2019 9:13 am

MarkNYC wrote:
Wed May 15, 2019 8:30 pm
xrayvsn wrote:
Tue May 14, 2019 9:53 am
I have been extremely fortunate to get in on the ground floor of my medical building when I bought shares in I believe 2007.

We are about to complete a sale of said property and essentially I am going to be hit with a massive tax bill via capital gains. The people selling the building (and the company purchasing the building) have structured the sale as sale of stock of the company that owns the building. The rationale, as I was explained, was so that the proceeds would be treated as capital gains where it tops out at 20% tax rate (I also believe the 3.8% surcharge is not applicable but not sure what the rationale was behind that (I think because we are continuing to rent it out and it is self rental maybe?). [If anyone knows what the real reason is I would be grateful]

I stand to make a 7 figure profit (no longer have any basis as it has already exceeded my original investment via distribution payouts). So I am looking at a $200k+ tax bill.
It is not clear why the gain would not be subject to the 3.8% Net Investment Income Tax. I assume the building was owned by an S Corporation and you owned stock in the S Corp. If so, what % of the S Corp stock did you own, and did you materially participate in the operation of the S Corp activities? Also, was the S Corp your employer?

If you did not materially participate in the S Corp operations then the activity is passive for you (regardless of any self-rental) and
the gain would be subject to the NII tax.

There may be other unstated relevant facts, but it might be worthwhile to consult a tax professional so you have a clear understanding as to why the gain on the sale of the stock should or should not be subject to the 3.8% NII tax.


I actually got a quick response back from my CFO:

The NIIT 3.8 avoidance is allowed under the self-rental rule. This is a fairly obscure provision in the tax code.

Gave me this link.

https://deandorton.com/self-rental-net- ... ncome-tax/

MarkNYC
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Re: Question on tax implications and what needs to be done

Post by MarkNYC » Thu May 16, 2019 9:34 am

xrayvsn wrote:
Thu May 16, 2019 9:13 am
MarkNYC wrote:
Wed May 15, 2019 8:30 pm
xrayvsn wrote:
Tue May 14, 2019 9:53 am
I have been extremely fortunate to get in on the ground floor of my medical building when I bought shares in I believe 2007.

We are about to complete a sale of said property and essentially I am going to be hit with a massive tax bill via capital gains. The people selling the building (and the company purchasing the building) have structured the sale as sale of stock of the company that owns the building. The rationale, as I was explained, was so that the proceeds would be treated as capital gains where it tops out at 20% tax rate (I also believe the 3.8% surcharge is not applicable but not sure what the rationale was behind that (I think because we are continuing to rent it out and it is self rental maybe?). [If anyone knows what the real reason is I would be grateful]

I stand to make a 7 figure profit (no longer have any basis as it has already exceeded my original investment via distribution payouts). So I am looking at a $200k+ tax bill.
It is not clear why the gain would not be subject to the 3.8% Net Investment Income Tax. I assume the building was owned by an S Corporation and you owned stock in the S Corp. If so, what % of the S Corp stock did you own, and did you materially participate in the operation of the S Corp activities? Also, was the S Corp your employer?

If you did not materially participate in the S Corp operations then the activity is passive for you (regardless of any self-rental) and
the gain would be subject to the NII tax.

There may be other unstated relevant facts, but it might be worthwhile to consult a tax professional so you have a clear understanding as to why the gain on the sale of the stock should or should not be subject to the 3.8% NII tax.

I actually got a quick response back from my CFO:

The NIIT 3.8 avoidance is allowed under the self-rental rule. This is a fairly obscure provision in the tax code.

Gave me this link.

https://deandorton.com/self-rental-net- ... ncome-tax/
As indicated in the linked article, in order to benefit from this self-rental rule you must "materially participate" in the business operations, which is why I raised the question: did you "materially participate' in the business activity? (if unsure,you can google guidelines for "material participation")

Topic Author
xrayvsn
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Re: Question on tax implications and what needs to be done

Post by xrayvsn » Thu May 16, 2019 9:58 am

MarkNYC wrote:
Thu May 16, 2019 9:34 am
xrayvsn wrote:
Thu May 16, 2019 9:13 am
MarkNYC wrote:
Wed May 15, 2019 8:30 pm
xrayvsn wrote:
Tue May 14, 2019 9:53 am
I have been extremely fortunate to get in on the ground floor of my medical building when I bought shares in I believe 2007.

We are about to complete a sale of said property and essentially I am going to be hit with a massive tax bill via capital gains. The people selling the building (and the company purchasing the building) have structured the sale as sale of stock of the company that owns the building. The rationale, as I was explained, was so that the proceeds would be treated as capital gains where it tops out at 20% tax rate (I also believe the 3.8% surcharge is not applicable but not sure what the rationale was behind that (I think because we are continuing to rent it out and it is self rental maybe?). [If anyone knows what the real reason is I would be grateful]

I stand to make a 7 figure profit (no longer have any basis as it has already exceeded my original investment via distribution payouts). So I am looking at a $200k+ tax bill.
It is not clear why the gain would not be subject to the 3.8% Net Investment Income Tax. I assume the building was owned by an S Corporation and you owned stock in the S Corp. If so, what % of the S Corp stock did you own, and did you materially participate in the operation of the S Corp activities? Also, was the S Corp your employer?

If you did not materially participate in the S Corp operations then the activity is passive for you (regardless of any self-rental) and
the gain would be subject to the NII tax.

There may be other unstated relevant facts, but it might be worthwhile to consult a tax professional so you have a clear understanding as to why the gain on the sale of the stock should or should not be subject to the 3.8% NII tax.

I actually got a quick response back from my CFO:

The NIIT 3.8 avoidance is allowed under the self-rental rule. This is a fairly obscure provision in the tax code.

Gave me this link.

https://deandorton.com/self-rental-net- ... ncome-tax/
As indicated in the linked article, in order to benefit from this self-rental rule you must "materially participate" in the business operations, which is why I raised the question: did you "materially participate' in the business activity? (if unsure,you can google guidelines for "material participation")

I believe I would qualify for it. The group practice is solely owned by the physicians that compromise it. We all have voting rights in operations, election of board members, etc. Hopefully that would satisfy material participation clause to avoid this tax.

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