Are real estate taxes on non-rental investment properties subject to the $10,000 SALT deduction cap?

The Tax Cuts and Jobs Act capped the deduction for state and local taxes (SALT) included in your federal itemized deductions at $10,000 for tax years 2018 through 2025.  However, suppose you pay real estate taxes related to a trade or business, including rental property. In this case, these taxes are deductible against the income generated from the trade or business and are not subject to the SALT deduction cap.

What happens to the taxes paid on real property held for investment purposes that is not part of a trade or business? You may choose to make an IRC Section 266 election and capitalize the real estate taxes, thereby increasing the basis in the property, which will reduce the potential gain generated from a future sale.  You can also deduct these real estate taxes in the year paid as part of your itemized deductions.

If you choose to treat these taxes as an itemized deduction, are they subject to the SALT deduction cap? This area has caused a lot of confusion and uncertainty due to unclear guidance from the IRS. However, after interpreting the Internal Revenue Code, IRC Section 212 provides that real estate taxes paid on investment property are not subject to the SALT deduction cap. Therefore, they are fully deductible as an itemized deduction in the year they are paid.

This could be a benefit to many of our clients and taxpayers in general. Contact one of our tax professionals to learn more.

Daniel Nitschke, CPA,
Principal, Tax Services