The SALT Deduction and Real Estate Clients

Few groups are as directly impacted by the recent increase in the State and Local Tax (SALT) deduction as real estate clients. For years, the $10,000 cap on SALT deductions eroded the financial appeal of owning multiple properties in high-tax states. With the passage of the One Big Beautiful Bill Act (OBBBA), however, the cap has been raised to $40,000, restoring meaningful tax relief for homeowners and investors.

For advisors, this change creates both opportunities and responsibilities. While the increased deduction can improve after-tax returns and cash flow for clients, it must be considered in the broader context of estate planning, long-term care planning, and wealth transfer strategies.

Why This Matters for Property Owners

Property owners in high-tax states like California, New York, and New Jersey were among the hardest hit under the old $10,000 cap. Many families paid tens of thousands in property taxes annually but could only deduct a fraction of it, effectively increasing their taxable income.

With the new $40,000 cap, the tax math looks very different:

• Families can now deduct a far greater portion of state income and property taxes, lowering their overall tax liability.
  
• Real estate ownership is once again more attractive from a tax perspective, particularly for those with high-value homes or multiple properties.
  
• Advisors can help clients use these deductions strategically, aligning property decisions with broader financial and estate planning goals.
  

Implications for Homeowners and Investors

1. Homeowners
For homeowners, particularly in high-tax states, this change provides real relief on property tax bills. Lower taxable income means more after-tax cash flow—resources that can be redirected toward:

• Increasing savings for retirement or college funding.
  
• Paying down mortgages or other debt.
  
• Reinvesting in home improvements that enhance long-term value.
  

2. Real Estate Investors
For investors, the higher deduction improves the after-tax return on real estate holdings. Rental income, once diminished by the SALT cap, now carries greater net benefit. This could make property investment more appealing compared to other asset classes. Advisors should also revisit whether investment diversification strategies should include additional real estate holdings under the new rules.

3. Second Property Owners
Families considering vacation homes or rental properties may find the decision more favorable with the higher SALT cap. The ability to deduct more in state and property taxes could tip the scales in favor of pursuing opportunities that were previously less attractive.

Coordinating with Estate and Medi-Cal Planning

While the expanded SALT deduction is a clear win for property owners, it is not without complications. Multiple property ownership may create risks in other areas of planning:

• Medi-Cal Eligibility: California has reinstated strict asset tests, with thresholds ranging from $2,000–$130,000 in countable assets. Owning more than one property could disqualify seniors from coverage, putting long-term care planning at risk.
  
• Estate Tax Planning: Although the OBBBA raised the federal estate exemption to $15 million per person, property values in high-cost states can escalate quickly. Clients with multiple properties should consider how future appreciation could impact estate size and potential tax liability.
  
• Liquidity Concerns: Real estate is not a liquid asset. Inheritance disputes, Medi-Cal recovery, or unplanned tax liability can force sales under unfavorable conditions if planning is not proactive.
  

For these reasons, collaboration between financial advisors and estate planning attorneys is essential. Together, you can balance the benefits of the higher SALT deduction with the risks associated with long-term care and estate taxation.

Advisor Best Practices

To help clients maximize the benefit of the SALT deduction while managing broader risks, advisors should:

1. Reassess Cash Flow Models: Update financial plans to reflect increased deductions and potential new real estate acquisitions.
   
2. Evaluate Itemization Strategies: With the higher cap, itemizing may once again provide significant benefits for many clients.
   
3. Revisit Property Investment Goals: Encourage clients to reconsider investment or second-home purchases in light of improved after-tax returns.
   
4. Coordinate with Legal Counsel: Ensure that property holdings and deductions are integrated with estate planning documents and Medi-Cal strategies.
   

The Takeaway

The OBBBA’s expansion of the SALT deduction to $40,000 is good news for real estate clients. It provides substantial tax relief, improves the appeal of property ownership, and creates new opportunities for both homeowners and investors. But these benefits do not exist in a vacuum. Advisors must guide clients to consider the intersection of tax planning, estate planning, and long-term care planning to ensure decisions made today support security and flexibility tomorrow.

Use the SALT deduction expansion as a touchpoint to re-engage real estate clients. Review their property holdings, tax strategies, and estate plans together to ensure they’re maximizing benefits while protecting against future risks.