SALT Deduction Cap Changes for Real Estate Investors in 2024

As real estate investors know, taxes can significantly impact profitability, especially when it comes to high-tax states. One of the most contentious tax issues for property owners in recent years has been the SALT (State and Local Tax) deduction cap, which was introduced in 2017 under the Tax Cuts and Jobs Act (TCJA). The SALT deduction allows taxpayers to deduct state and local taxes, including property taxes, from their federal taxable income, but the 2017 reforms placed a cap of $10,000 on this deduction.

For many real estate investors, particularly those owning properties in high-tax states such as New York, California, and New Jersey, the SALT cap has been a significant burden. Now, in 2024, there is growing discussion around changes to this cap, potentially offering relief or further complications for property owners.

This article will explore the current state of the SALT deduction, the proposed changes in 2024, and how these changes could affect different types of real estate investors.

What is the SALT Deduction?

Before the TCJA, taxpayers could deduct the full amount of their state and local taxes, including property, income, and sales taxes, from their federal taxable income. This provided significant relief for taxpayers in states with high property and income tax rates. However, with the 2017 tax reform, a $10,000 cap was placed on SALT deductions for both single and married joint filers. This limitation was felt particularly hard by individuals and investors in high-tax areas, as property taxes alone often exceed $10,000 annually.

The cap primarily affects high-income taxpayers, including many real estate investors who own multiple properties. For example, a landlord with several properties in a state like New York may pay tens of thousands of dollars in property taxes alone, not to mention state income tax. Under the current law, only $10,000 of that amount can be deducted on federal returns, increasing the overall tax burden for property investors.

Proposed SALT Cap Changes in 2024

In 2024, there are discussions in Congress about revisiting the SALT deduction cap, and these conversations could lead to significant changes. While no definitive legislation has been passed at the time of writing, there are several proposals being considered:

One major proposal is to raise the SALT deduction cap. This would allow taxpayers to deduct more than the current $10,000, offering relief to property owners in states with high tax rates. For example, raising the cap to $20,000 or even removing it altogether would dramatically reduce federal tax liabilities for investors with high state and local tax burdens.

Another potential change could be implementing an income-based cap. Some lawmakers propose adjusting the SALT deduction cap based on a taxpayer’s income, which means higher earners would still face a deduction limit, while lower- and middle-income taxpayers might be able to deduct a larger portion of their state and local taxes. This approach could help real estate investors who are not in the top income brackets but still face high property tax burdens.

There is also talk about keeping the cap as-is, particularly among lawmakers concerned about lost federal revenue if the cap is lifted. This outcome would likely maintain the current financial pressure on property owners in high-tax states.

Impact on Real Estate Investors

Landlords and Property Investors

For landlords who own property in high-tax states, changes to the SALT deduction cap could significantly impact their tax liabilities. Property taxes in states like New York, New Jersey, and California often exceed the $10,000 cap, especially for those owning multiple or high-value properties. If the cap is raised or removed, landlords could see a substantial reduction in federal taxes, increasing their overall profitability.

For example, consider a landlord in New York City who pays $20,000 in property taxes annually. Under current law, they can only deduct $10,000, but if the cap were raised or eliminated, they could deduct the full amount, potentially saving thousands on their federal tax bill.

Syndicators

Real estate syndicators, who often pool investor funds to buy large commercial or residential properties, may also be significantly affected by SALT deduction changes. Syndicators with high-tax properties would benefit from an increased cap, as it could improve the tax efficiency of their investments. This might lead to higher returns for investors in syndications, making these investments more attractive.

In high-tax markets like San Francisco or New York, where syndicators often operate, a higher SALT deduction could also lead to more investment in local real estate, as the overall tax burden on property ownership would decrease.

Flippers and Wholesalers

For flippers, who tend to hold properties for shorter periods, the impact of the SALT deduction cap may be less direct. Flippers generally focus more on capital gains and short-term tax issues, so changes to the SALT cap might not significantly affect their tax strategy. However, in states with high property taxes, even short-term ownership could mean paying taxes that exceed the deduction limit, so an increased cap could still offer some relief.

Wholesalers, who typically don’t own properties but deal in contract assignments, would likely be the least affected by SALT cap changes. Since wholesalers don’t directly pay property taxes, the cap has little to no impact on their business model.

Strategies for Real Estate Investors

With potential changes to the SALT deduction cap on the horizon, real estate investors should start planning now to maximize their tax efficiency. Here are a few strategies to consider:

One strategy is to time property sales or purchases based on expected changes to the SALT cap. If you’re in a high-tax state and expect the cap to be lifted or increased, it may make sense to delay certain property transactions until after the change, so you can take full advantage of the higher deduction.

For syndicators and those managing large portfolios, structuring investments to maximize the benefit of potential changes could be key. This might involve focusing on properties in high-tax areas, which could become more attractive if investors can deduct a larger portion of their tax liabilities.

Lastly, consulting with tax professionals is always critical. Changes to the SALT deduction cap will have different impacts depending on the specifics of your portfolio and location, so working with a qualified tax advisor will ensure you’re taking full advantage of any new rules.

The potential changes to the SALT deduction cap in 2024 could have a profound impact on real estate investors, particularly those in high-tax states. Whether the cap is raised, removed, or adjusted based on income, understanding how these changes will affect your tax strategy is crucial to maintaining profitability in a high-tax environment.

For landlords, syndicators, and investors with substantial property portfolios, lifting the SALT cap could offer substantial tax savings and make investing in high-tax markets more attractive. On the other hand, if the cap remains unchanged, investors will need to continue planning around the $10,000 limit, seeking alternative ways to minimize their tax liabilities.

As always, staying informed and proactive about tax changes is the best way to protect your real estate investments and ensure long-term growth.