The $10,000 SALT Limit and the Rental Real Estate
Under the recently enacted Tax Cuts and Jobs Act, State And Local Tax (SALT) deductions are limited to $10,000. How does this affect the individual taxpayer?
QUESTION: Are SALT payments made on my rental real estate subject to the $10,000 cap?
ANSWER: Generally, under the old law, all SALT payments were deductible. However, the new law caps deductible SALT at an aggregate of $10,000 for individual taxpayers.
Notwithstanding, the section of the law that allows for the deduction of expenses on assets used to generate income (including rental real estate) remains unchanged. Thus, all SALT payments made by an individual taxpayers in respect of an asset used to generate income, as an ordinary and necessary expenses, remain deductible to the individual taxpayer against income from such asset(s).
The $10,000 SALT cap will generally apply to SALT expenses deductible on Schedule A of the tax return. However, SALT expenses relating to a rental real estate will generally show up on Schedule E of a tax return. The SALT cap generally does not apply to Schedule E part of a tax return.
QUESTION: I have a two-family home where I rent out one-half to tenants year round. Does the $10,000 SALT cap apply to my expenses on the house?
ANSWER: Taxpayers who rent out a part of their homes generally report expenses on such homes on both Schedule A and Schedule E, splitting the expenses thereof accordingly. To the extent that the SALT expenses on Schedule A of the taxpayer’s returns exceed $10,000, the cap will apply and only the first $10,000 thereof will be deductible. SALT expenses on Schedule E, however, are not generally subject to the $10,000, as they are part of “ordinary and necessary” expenses incurred in generating income.
