Property taxes are deductible, but the 2017 Tax Cuts and Jobs Act introduced the $10,000 state and local tax (SALT) cap that severely limits how much homeowners can actually deduct. The cap combines state income taxes (or state sales taxes if the borrower elects that method) and property taxes. For many homeowners in high-tax states, the cap is hit before all their property taxes are even counted.
How the SALT Cap Works
The SALT deduction cap is $10,000 for single filers and for married filing jointly. For married filing separately, the cap is $5,000 per person. The $10,000 covers the combined total of state and local income taxes and property taxes. A homeowner in New Jersey paying $15,000 in property taxes and $10,000 in state income taxes can only deduct $10,000 total across both. The remaining $15,000 provides no federal tax benefit.
Investment Properties Are Different
Property taxes on investment properties are deductible as an ordinary business expense on Schedule E, and are NOT subject to the SALT cap. This is a meaningful distinction. An investor with $20,000 in property taxes on a rental property can deduct all $20,000 against rental income. The SALT cap applies only to personal (non-business) property taxes, meaning your primary and secondary residences.
- ✦Primary residence property taxes: subject to SALT cap; only deductible up to the combined $10,000 limit
- ✦Investment property taxes: fully deductible on Schedule E as a rental expense; no SALT cap applies
- ✦Must itemize: the SALT deduction only applies if total itemized deductions exceed the standard deduction
Aria can help compare the after-tax cost of property ownership across primary and investment scenarios. Ask at vicariointel.com.
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