The short answer
For 2026 the deduction for state and local taxes on Schedule A is capped at $40,400 ($20,200 married filing separately), and the cap shrinks by 30 cents for every dollar of modified adjusted gross income above $505,000 until it reaches $10,000. Property taxes on a rental are not inside that cap at all: section 164(b)(6) excludes taxes paid in carrying on a trade or business or an activity described in section 212, so they are deducted in full on Schedule E. The state income tax you pay on a rental's gain, however, is a personal tax that lands on Schedule A and counts against the cap.
At a glance
| 2026 cap | $40,400; $20,200 married filing separately |
|---|---|
| Phase-down | Cap falls by 30% of MAGI over $505,000, never below $10,000; fully down at about $606,000 of MAGI |
| Later years | 101% of the prior year's cap for 2027 through 2029; $10,000 from 2030 |
| Rental property taxes | Deducted on Schedule E without limit; the cap does not apply to taxes in a trade or business or section 212 activity |
| State income tax on a sale | Personal tax, Schedule A, inside the cap |
| Mixed-use home | Tax is split by days; the rental-day share goes on Schedule E |
| Entity-level state taxes | Elective pass-through entity taxes are deducted by the entity under Notice 2020-75 |
The 2026 cap is $40,400, and it falls back to $10,000 once MAGI passes about $606,000
Public Law 119-21 section 70120 rewrote section 164(b)(6) and added section 164(b)(7). The itemized deduction for state and local income, sales and property taxes is limited to $40,000 for 2025, $40,400 for 2026 and 101% of the prior year's amount for 2027 through 2029, then $10,000 from 2030. Married-separate filers get half.
The cap is reduced by 30% of the amount by which modified adjusted gross income exceeds $500,000 for 2025 or $505,000 for 2026, indexed at 101% a year after that, but never below $10,000. For 2026 the arithmetic runs out at $505,000 plus $101,333, so a filer with MAGI of about $606,000 or more is back to the $10,000 cap of 2018 through 2024. Foreign real property taxes are not deductible on Schedule A at all.
Rental property taxes are deducted on Schedule E because the cap exempts taxes paid in a trade or business or a section 212 activity
The flush language of section 164(b)(6) says the limitation does not apply to taxes paid or accrued in carrying on a trade or business or an activity described in section 212, which covers expenses for the production of income and for the management, conservation or maintenance of property held for the production of income. A rental is one or the other, so its property taxes are an ordinary rental expense.
Publication 527 lists taxes among deductible rental expenses, with one carve-out: charges for local benefits that increase the property's value, such as a new sewer line, are added to basis rather than deducted, though assessments for maintaining or repairing those improvements, or for interest on them, remain deductible. The same logic puts the property taxes of a partnership-owned or LLC-owned rental into the entity's rental income computation, never onto a partner's Schedule A.
A sale year can erase the cap: the gain lifts MAGI past $505,000, and the state income tax on that gain is a personal, capped tax
Hypothetical: a couple with $200,000 of MAGI sells a rental in 2026 for a $500,000 gain. Their MAGI is now $700,000, so their 2026 cap is $10,000. The state income tax on that gain, say $25,000 in a flat 5% state, is a tax on their personal return, not a Schedule E expense, so it goes on Schedule A and all but $10,000 of their combined state income and home property taxes is lost. If they pay the state tax with their 2027 return instead, it falls under the 2027 cap, but their 2027 MAGI without the gain decides that cap. Run your own numbers with your CPA.
A 1031 exchange changes both halves. Deferred gain never enters MAGI, so the phase-down does not trigger, and in states that follow the federal deferral there is no state income tax on the gain to deduct in the first place; does a 1031 defer state capital gains tax and the state rates page cover which states conform.
Second homes and mixed-use rentals split the tax between Schedule E and Schedule A by days of use
The Schedule E instructions require expenses on a dwelling you also use personally to be allocated by days: with 7 personal days and 63 rental days, 10% of the expenses are not rental expenses. The rental share of the property tax goes on Schedule E outside the cap; the personal share goes on Schedule A inside it.
Under section 280A(g), a home rented fewer than 15 days in the year reports no rental income and claims no rental deductions, so all of its property tax is a capped Schedule A item. Capital gains tax on a second home and 1031 with vacation and short-term rental use explain what the same day counts do to a later sale or exchange.
Pass-through entity taxes and the 2025 Act: the entity-level workaround survived and the cap returns to $10,000 in 2030
Notice 2020-75 states that state and local income taxes imposed on and paid by a partnership or S corporation are deductible by the entity in computing its non-separately stated income and are not taken into account in applying section 164(b)(6) to the partner or shareholder, for payments made on or after November 9, 2020. The 2025 Act changed only the dollar amounts and the phase-down, so an elective entity-level tax on a rental held through an LLC taxed as a partnership still clears the cap where the state offers one.
The cap is a 2018 to 2029 phenomenon with a scheduled return to $10,000, which argues for deferring a large state tax bill rather than absorbing it in a capped year. Can an LLC do a 1031 exchange and 1031 high-income tax planning cover the entity and timing questions.
Related questions
Are the property taxes on my rental limited to $40,400?
No. Section 164(b)(6) does not apply to taxes paid in a trade or business or a section 212 activity, and a rental is one of those, so the full property tax is a Schedule E expense.
If I pay the state tax on a 2026 sale in April 2027, which year's cap applies?
A cash-basis individual deducts the tax in the year paid, so the 2027 cap, 101% of the 2026 figure, and the 2027 phase-down based on 2027 MAGI apply. Estimated payments made in 2026 fall under the 2026 cap.
Does a 1031 exchange help with the SALT cap?
Indirectly. The deferred gain is excluded from MAGI, so the cap is not phased down, and in conforming states no state income tax is due on the gain, so there is nothing to lose to the cap.
My rental is in an LLC. Does the cap apply?
A single-member LLC reports on Schedule E, so the property tax is uncapped as before. A multi-member LLC taxed as a partnership deducts the property tax in computing rental income, and where the state offers an elective entity-level income tax, Notice 2020-75 keeps that outside the owner's cap.
Do foreign property taxes count?
On Schedule A, no: section 164(b)(6)(A) excludes foreign real property taxes from the itemized deduction entirely. Property taxes on a foreign rental remain deductible against its rental income because the trade-or-business exception still covers them.
Sources
Checked against these publications on September 30, 2026. Rules and figures change; confirm the current version with your CPA or attorney before you act. This page is general information, not tax or legal advice.
- IRC section 164, taxes (164(b)(6) and (b)(7))
- IRC section 212, expenses for production of income
- IRS Publication 527, Residential Rental Property
- Instructions for Schedule E (Form 1040)
- IRC section 280A, dwelling unit used as residence
- Notice 2020-75, state and local taxes paid by pass-through entities
- Public Law 119-21 (July 4, 2025)