• The 2017 SALT deduction cap limits state and local tax deductions to $10,000.
• Homeowners in high-tax states, especially those with expensive homes and high property taxes, generally paid more in federal taxes due to the cap.
• This legislation - implemented in President Trump’s first term - is set to expire at the end of 2025.

Impact on Real Estate and Relocation

‍The SALT cap has increased the federal tax liability for wealthy individuals, particularly those in high-tax states like New Jersey, New York, and California, who previously benefited from fully deductible property and state income taxes. This has reduced the tax efficiency of real estate ownership in these states, prompting some investors to consider relocating to states with no or lower state income taxes, such as Florida or Texas.

‍Financial and Tax Planning Strategies

‍To mitigate the impact of the SALT cap, high-net-worth investors are exploring various strategies. Some are restructuring income through pass-through entities, allowing state taxes to be deducted as business expenses. Others are turning to charitable giving strategies, such as Donor Advised Funds (DAFs) and Charitable Remainder Trusts (CRTs), which provide immediate tax deductions and other benefits.

Shifting investments to tax-exempt municipal bonds, which are generally exempt from federal and state taxes, is another strategy for retaining more income in high-tax states. Additionally, relocating business operations to low-tax jurisdictions can result in substantial savings, especially for pass-through entities where income is taxed at the personal level.

Income deferral or acceleration strategies are also being employed to optimize tax outcomes. Deferring income to future low-tax years or accelerating it into years with lower expected tax burdens can be advantageous. Roth IRA conversions in low-income years can also provide tax-free growth and future withdrawals.

‍Expiration of the SALT Cap

‍The SALT cap is set to expire at the end of 2025, unless Congress passes an extension or new legislation. This will bring relief to many wealthy taxpayers, especially those in high-tax states. Starting in 2026, taxpayers who itemize their deductions will no longer have a limit on state and local tax deductions. This change will be reflected in 2027 tax returns for the 2026 tax year.