DETROIT – Last week the U.S. Department of the Treasury issued Final Regulations addressing the net investment income tax provisions of IRC ?1411. These Final Regulations modify certain provisions of the Proposed Regulations that were issued in December, 2012.
On October 29, 2013 we issued an E-Alert that describes planning opportunities under the Proposed Regulations dealing with rental income. The E-Alert (which can be viewed here) states that under the Proposed Regulations, individuals with real estate rented to a related business entity should consider a ?grouping? election to essentially combine the rental activity with the operating business activity for purposes of determining whether the combined activity is a passive activity with respect to the individual. An individual?s material participation in the operating business activity would mean that income from the grouped activity would not be passive income subject to the net investment income tax.
The October 29, 2013 E-Alert also indicated that under the Proposed Regulations, including language in the Preamble to these Regulations, clients should consider modifying leases between the rental entity and the operating business entity so that income from the rental activity would qualify as a trade or business income not subject to the net investment income tax. We also mentioned that the final regulations may eliminate the need to amend lease arrangements.
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