New SALT Deduction Rule Brings Welcome Property Tax Relief for Californians

According to Kiplinger, California homeowners are set to benefit from a new rule that allows for increased property tax savings under the federal SALT (State and Local Tax) deduction. This is great news for homeowners and potential buyers in high-cost areas like California, where property taxes can significantly affect the total cost of homeownership.

Here's what you need to know and why we think this change is a smart move for those invested in California real estate.

What Is the SALT Deduction?

The SALT deduction allows taxpayers to deduct certain taxes paid to state and local governments, including property, income, and sales taxes. Prior to 2018, there was no cap on this deduction. However, the Tax Cuts and Jobs Act (TCJA) of 2017 imposed a $10,000 cap on SALT deductions, which disproportionately impacted taxpayers in states with high property values and state taxes, such as California.

What Changed in California

Thanks to a recently passed bill signed by Governor Gavin Newsom, Californians will now see expanded opportunities to deduct more of their property taxes through a workaround designed to ease the SALT deduction cap's burden. This new provision allows certain property owners, particularly those who own pass-through entities such as LLCs, S corporations, and partnerships, to deduct more of their state tax payments on their federal returns by restructuring how they pay these taxes.

While this workaround doesn't completely eliminate the $10,000 SALT cap for all taxpayers, it does offer substantial relief for a significant number of homeowners, especially those with more complex ownership structures.

Why This Matters for Homeowners and Buyers

For existing homeowners, this change means a larger federal tax deduction, which translates into real savings come tax season. For prospective buyers, especially those looking at properties in high-tax areas, this tax break can make the prospect of buying a home more financially viable.

At a time when mortgage rates and housing prices have both climbed in many parts of California, any opportunity to offset ownership costs is welcome news. This rule change comes at an ideal moment, potentially helping to restore confidence and affordability to key segments of the housing market.

Who Benefits Most?

Owners of pass-through entities will benefit the most under this change. These are typically small business owners or individuals who own real estate through LLCs or partnerships. If structured correctly, they can now pay state income taxes at the entity level, which allows the business to deduct these taxes federally and pass the benefits down to individual owners.

This creates an opening for smart tax planning, especially for those who own investment properties or operate rental homes. It's also a positive development for those with diversified property holdings, as it gives them more control over how they manage their tax liabilities.

What This Means for Real Estate in California

We believe this change may bring a small but meaningful boost to California's real estate market. Buyers who were previously deterred by high property taxes might reconsider, knowing they can now recoup more of those expenses at the federal level. It may also encourage more people to explore the benefits of forming pass-through entities when purchasing investment properties.

Additionally, as the market adjusts to this new tax environment, we could see increased interest in higher-value homes or investment properties, particularly in regions where state and local taxes have historically been a deterrent.

A Step in the Right Direction

While this doesn't fully restore the unlimited SALT deduction, it's a step in the right direction. Tax policy will always be complex and evolving, but we appreciate efforts like this that bring some relief to those who shoulder the highest property tax burdens.

As real estate professionals, we see firsthand how tax changes influence buying and selling decisions. This development is one more reason to consider the long-term value of real estate ownership in California. Whether you're a first-time buyer, a seasoned investor, or someone planning your next move, staying informed about policy shifts like this is key to making sound financial decisions.

Tax laws are never static, and the landscape can shift quickly. If you're thinking about buying, selling, or investing in California real estate, now is a good time to revisit your strategy in light of this SALT deduction change. It could open up new possibilities and savings you hadn't considered before.

We'll continue to monitor these changes and provide insights on how they affect the local market. If you have questions about what this means for your real estate plans or want to explore how to make the most of these updates, reach out to our team. We're here to help you move forward with confidence.

Source: kiplinger.com