Section 1031 exchanges are not included in net investment income ( NII ). The proposed IRS regulations to implement IRC Section 1411 were circulated for comment in December 2012. It was clearly stated in the prologue to the proposed regulations that deferred gain from a 1031 exchange “was not recognized for purposes of determining net investment income”. The 3.8% Medicare tax is based on the reported NII.

This is reinforced in the final IRS instructions for Form 8960, ‘Net Investment Income Tax’, dated  February 26, 2014, where it states gain from “section 1031 (like-kind exchanges) is not included in net investment income”.

Simply – a 1031 exchange avoids the 3.8% Medicare Tax