Are Property Taxes Deductible?

Under the current federal framework, real estate taxes are deductible as part of the broader State and Local Tax (SALT) deduction. This deduction allows taxpayers who itemize on Schedule A to subtract eligible property taxes, personal property taxes, and either state income or general sales taxes from their federal taxable income.

‍

For the 2026 tax year, the standard deduction has been indexed to $32,200 for married couples filing jointly and $16,100 for single filers. Consequently, a property tax deduction on federal taxes only yields a benefit when total itemized deductions exceed these thresholds.

‍

The most significant shift for 2026 is the quadrupling of the individual SALT cap to $40,400, up from the restrictive $10,000 limit imposed by previous legislation. However, this expanded ceiling is subject to a steep, marginal phase-out mechanism targeting high earners. For the 2026 tax year, the phase-out threshold begins at a modified adjusted gross income (MAGI) of $505,000 for single and joint filers. For every dollar of MAGI exceeding this limit, the allowable SALT cap is reduced by 30 cents.

‍

Data modeling shows that any taxpayer with a 2026 MAGI equal to or exceeding $606,333 will find their SALT deduction cap fully reduced to a statutory floor of $10,000. This math dictates that ultra-high-income households often derive no additional benefit from the expanded 2026 cap without advanced structural planning.

Even when a taxpayer falls below the income phase-out thresholds, two federal overlays frequently neutralize the nominal benefits of the property tax deduction. The first is the OBBBA’s permanent repeal of the "Pease limitation," which was replaced by a new restriction for those in the 37% federal tax bracket. This provision caps the maximum tax benefit of all itemized deductions—including state and local taxes and mortgage interest—at 35%. In practice, even a successful $40,400 deduction is limited to approximately 35 cents of savings on the dollar for top-bracket earners.

‍

The more significant threat to the utility of your property tax deduction is the structural change to the Alternative Minimum Tax. While the OBBBA preserved higher AMT exemption amounts ($140,200 for joint filers), it executed an aggressive reversion of the exemption phase-out thresholds. Starting in 2026, the phase-out rate has been accelerated to 50% of income exceeding the threshold.

‍

Because state and local taxes are entirely disallowed for AMT purposes, high-income households pulled into the AMT zone will see the federal benefit of their property tax deductions completely eliminated. Households with incomes between $1,000,000 and $1,500,000 face a heightened risk of falling into this "AMT snare".

While federal law dictates the deduction, California state law governs the underlying liability. California’s Proposition 13 is still the bedrock of the system, capping base property tax rates at 1% of assessed value and limiting annual increases to a maximum inflation factor of 2%. However, assuming a property’s carrying cost is precisely 1% is a common planning error.

‍

Effective tax rates in established coastal cities typically range from 1.1% to 1.3% once local voter-approved bonds and infrastructure levies are incorporated. In newer luxury developments subject to Community Facilities Districts (Mello-Roos), effective rates can climb to between 1.5% and 2.1%. For a luxury residence in Irvine's Great Park purchased for $3,000,000, an effective rate of 1.75% creates an annual property tax liability of $52,500. In this scenario, even with a full $40,400 SALT cap, $12,100 of the property tax payment is instantly lost as a federal deduction.

‍

Furthermore, new buyers need to account for supplemental tax bills. Upon purchase, properties are reassessed at current market value, and the county issues one-time "catch-up" bills to bridge the gap between the seller's old tax basis and the new purchase price.

Given the interaction of the $40,400 cap and the AMT, sophisticated portfolios often utilize three primary workarounds to maximize real estate tax deductions.

‍

First, the California Pass-Through Entity Tax (PTET) is a top-tier strategy for business owners. Qualifying S corporations and partnerships can elect to pay state income tax at a flat rate of 9.3% at the entity level. Because this tax is claimed as a direct deduction on the business's federal return, it reduces the ordinary income reported to owners on their K-1s without being subject to the individual $40,400 SALT cap. Notably, starting in 2026, an insufficient June 15 prepayment no longer invalidates the election, though it triggers a 12.5% reduction in the personal tax credit.

‍

Second, high-net-worth families with massive property tax bills can utilize "SALT stacking" through multiple non-grantor trusts. Because a non-grantor trust is a separate taxable entity, it is entitled to its own independent $40,400 SALT deduction. By transferring fractional deed interests to separate trusts with unique beneficiaries, a family facing an $80,000 tax bill can potentially deduct the entire amount across two trust returns.

‍

Finally, the property tax deduction federal cap strictly applies to personal-use property. Property taxes on real estate held for business or rental purposes are fully deductible on Schedule C or Schedule E without any cap or limitation. Converting a secondary residence into a rental property allows every dollar of the tax bill to be deducted against rental income, effectively bypassing the individual SALT restrictions entirely.