Net investment income tax on cash from a partial 1031 exchange?

[lankfordr003]

I don't understand why the cash from a partial 1031 exchange is being taxed as NIIT.  I have sold the same type of rental real estate in the past without doing an exchange and the proceeds were not taxed as Net Investment Income

[tagteam]

I'm fairly certain that should be excluded on Line 4a of your 8960 since it's nonpassive income.

I will page @AmeliesUncle for input here.

[AmeliesUncle]

If the rental rises to the level of a Trade or Business AND you Materially Participate in that business, the capital gain is not subject to NIIT.

If that does not apply, the capital gain is subject to NIIT.

I suspect that TurboTax automatically assumes it is NOT a Trade or Business, and therefore subject to NIIT.

As for why your prior transaction did that, I don't know.  Maybe your income was not high enough to be subject to NIIT.  Maybe you used a different program.  Maybe I am wrong and TurboTax does have the capability to exclude it from NIIT and you entered it differently.  Maybe something else.