Big Beautiful Bill: Real Estate Tax Changes for Homeowners

The Big Beautiful Bill property tax deduction change most homeowners care about is simple: the federal cap on deductible state and local taxes jumped from $10,000 to $40,000 starting with tax year 2025, which means far more of your property tax bill can now shelter income on your federal return if you itemize.¹ The higher cap isn’t permanent, and high earners see it shrink back toward the old $10,000 limit.

The New Cap and How It Changes Through 2029

The One Big Beautiful Bill Act, signed July 4, 2025, amended 26 U.S.C. § 164 to raise the combined state and local tax cap on this schedule:²

2025: $40,000
2026: $40,400
2027 through 2029: 101% of the prior year’s amount
2030 and later: $10,000

Married filing separately gets exactly half of each figure — $20,000 in 2025, $20,200 in 2026, and so on.² The cap still covers the same bundle it always did: your state and local income taxes (or sales taxes if you elect them instead), plus property taxes, all inside one combined limit.

Mark 2030 on the calendar. Unless Congress extends the change, the cap resets to $10,000 — the same limit the 2017 Tax Cuts and Jobs Act imposed. Anyone planning a home purchase, mortgage payoff, or move to a high-tax state around then should factor the reset in.

Who Loses the Benefit at Higher Incomes

The bigger cap phases out for high earners. If your modified adjusted gross income tops $500,000 ($250,000 if married filing separately), the $40,000 cap starts shrinking by 30 cents for every dollar of income above the threshold, and it bottoms out at $10,000.² The $500,000 threshold also grows by 1% a year through 2029.

The full cap is available to most middle- and upper-middle-income households. By the time income clears roughly $600,000, the phase-out has eaten the entire increase and only the old $10,000 deduction remains. Taxpayers near the $500,000 line have the most to gain from timing income or bunching deductions to stay under it in a given year.

Whether Itemizing Still Pays Off

A higher SALT cap only helps you if your itemized deductions beat the standard deduction. For 2026, the standard deduction is $32,200 for married filing jointly, $16,100 for single filers and married filing separately, and $24,150 for heads of household.³ Property taxes count only if your total itemized deductions — property taxes, state income taxes, mortgage interest, charitable gifts, and the rest — clear those thresholds.

The math shifted meaningfully. A married couple paying $25,000 in property and state income taxes, $12,000 in mortgage interest, and $3,000 in charitable contributions comes to $40,000 in itemized deductions. Under the old $10,000 cap, that same couple would have been capped at roughly $25,000 total and might have been better off with the standard deduction. With the new limit, they’re comfortably above the $32,200 threshold and gain the full benefit of itemizing.

Which Property Tax Charges Qualify

To be deductible, a real estate tax has to be based on the assessed value of your property (an ad valorem tax), levied at a uniform rate on all properties in the jurisdiction, and paid to a governmental body.⁴ Standard county and municipal property taxes that fund schools, roads, and general operations meet the test. Supplemental bills that reassess your value after a sale or improvement generally do too.

Charges You Cannot Deduct

A few common items on your homeowner ledger look like property taxes but aren’t:

Per-unit water charges, monthly trash fees, and flat fees for fire or police protection are payments for services, not taxes on value.⁴
Homeowners association dues are paid to a private entity, not a government, so they never qualify.⁴
Local improvement assessments for sidewalks, sewer lines, or water mains get added to your home’s cost basis rather than deducted.⁴
Foreign real estate taxes on a personal residence or vacation home outside the United States are still not deductible; the 2017 law removed that deduction and the Big Beautiful Bill did not bring it back. Foreign taxes on a rental property are a different matter and can be deducted as a business expense on Schedule E.²

Rental and Business Property Aren’t Capped

Property taxes on rentals or property used in a trade or business fall entirely outside the SALT cap. The statute carves out taxes “paid or accrued in carrying on a trade or business” from the limit.² These deductions land on Schedule E for rentals or Schedule C for sole proprietors and reduce business income dollar for dollar with no ceiling.

The split matters for anyone with mixed-use property. If you live in half of a duplex and rent the other half, the property taxes allocated to the rental unit go on Schedule E outside the cap, while the taxes on your personal side go on Schedule A subject to the $40,400 limit in 2026. The same principle applies to a home office: the business-use percentage of your property taxes becomes a business deduction rather than a SALT deduction.

Property Taxes When You Buy or Sell Mid-Year

When a home changes hands during the year, both parties can deduct their share of the property taxes regardless of who actually paid the bill. The seller is treated as paying through the day before closing; the buyer picks up from the closing date through year-end.⁴

The formula is straightforward: divide the annual tax by 365, then multiply by the days you owned the property. If you close on September 1 and the full-year tax is $730, your 122-day share is about $244, and you can claim it even if the seller already prepaid the entire year.⁴

Watch out for delinquent taxes at closing. If you agree to pay the seller’s back taxes as part of the deal, that amount is treated as part of your purchase price and added to your cost basis in the home; it isn’t deductible.⁴ The higher basis can reduce your taxable gain when you sell later, but it provides no current-year deduction.

How to Claim the Deduction

Deductible real estate taxes go on Schedule A, line 5b.⁵ They’re combined with your state and local income or sales taxes, and the total is then subject to the applicable cap on line 5e. Tax software applies the cap automatically once you enter the underlying figures.

Your main documentation is Form 1098, the Mortgage Interest Statement your lender issues each January. If your mortgage includes escrow for taxes, Box 10 shows what the lender paid on your behalf during the year.⁶ Cross-check that figure against your county or municipal tax bills, since escrow disbursements don’t always line up neatly with the calendar year. If you pay taxes directly, keep the receipts and bank records. Buyers should also pull property tax amounts from their Closing Disclosure, which will capture prorations and initial escrow deposits that Form 1098 might miss.

Hold on to your return and supporting records for at least three years from filing, which matches the standard IRS audit window.⁷

One Related Change: Home Energy Credits Have Ended

Homeowners planning around the new cap should know that two federal energy credits ended at the same time. The Energy Efficient Home Improvement Credit under Section 25C (covering insulation, windows, heat pumps, and similar upgrades) and the Residential Clean Energy Credit under Section 25D (covering solar and battery storage) expired at the end of 2025 and were not extended.⁸ Equipment installed before January 1, 2026 can still be claimed on your 2025 return; anything installed after that gets no federal energy credit.

1
Congress.gov. H.R.1 – 119th Congress (2025-2026)
2
Office of the Law Revision Counsel. 26 USC 164 – Taxes
3
Internal Revenue Service. IRS Releases Tax Inflation Adjustments for Tax Year 2026
4
Internal Revenue Service. Publication 530 – Tax Information for Homeowners
5
Internal Revenue Service. Instructions for Schedule A (Form 1040) – Section: Line 5b
6
Internal Revenue Service. About Form 1098, Mortgage Interest Statement
7
Internal Revenue Service. How Long Should I Keep Records?
8
Internal Revenue Service. One, Big, Beautiful Bill Provisions