SALT deductions can provide valuable savings for both businesses and individuals. However, recent legislation has limited the benefits for many. Nonetheless, every taxpayer should take advantage of this still-lucrative deduction. In this post, we’ll cover SALT deduction tips that could deliver big savings for Airbnb hosts.
What is a SALT Deduction?
For taxpayers that opt to itemize, the SALT deduction is one of the most valuable write-offs.
It allows taxpayers to receive a federal tax deduction to compensate for state and local taxes paid. Historically, it was one of the most substantial deductions available to individuals.
The rules changed in 2017, but we’ll get more into that later. Regardless, it’s still one of the most valuable deductions for everyday taxpayers and businesses alike.
What State and Local Taxes Qualify?
Several types of taxes can qualify under the SALT deduction, including state income taxes, property taxes, and sales taxes. However, there are some stipulations.
For example, you can’t deduct both state income tax and sales tax. You have to take one or the other.
Property tax deductions also come with some conditions. SALT deductions are available for taxes on primary and secondary residences, vehicles, and property held as an investment but not otherwise used.
SALT does not include property taxes paid on a rental property. You must list those expenses under Schedule E, so they don’t qualify as itemized deductions.
Furthermore, can only include the taxes you actually paid during the calendar year.
For example, you owe $6,000 in property tax for the tax year, but you only paid $3,000. In this scenario, you can only claim a $3,000 SALT deduction.
Deducting sales taxes is also allowable, and it’s an excellent option for taxpayers in states with no income tax. You don’t need to save all your receipts to claim it, either.
The IRS has a table of standard sales tax deductions based on location and income, so you can easily claim a write-off without keeping receipts.
Who Can Claim State and Local Tax Deductions?
Both businesses and individuals can claim SALT deductions. However, businesses aren’t subject to the same limitations as individuals.
Business filers can deduct unlimited state and local taxes from their return.
Most states don’t impose additional taxes on pass-through entities like LLCs and S-corporations. But, state taxes on pass-through earnings are deductible expenses on the entity’s federal taxable income.
What is the Cap for SALT Deductions?
Prior to 2017, taxpayers could claim unlimited SALT deductions. However, the Tax Cuts and Jobs Act limited SALT deductions to $10,000 per year.
The new law primarily impacted taxpayers in high-income tax states, but it also applies to taxpayers throughout the country.
Will the Cap on SALT Deductions Be Overturned?
High-tax states protested the $10,000 SALT cap when it was implemented, and several proposals to change the $10,000 SALT limitation are being debated. Some suggest removing the limit entirely, while others seek to phase-out deductions based on income.
Even if the SALT cap is not overturned, the limitation is set to expire in 2025 and would return to its previous unlimited amount. At this time, no deal is in place to renew the cap, and there are no active negotiations among lawmakers to do so either.
What Happens if the Cap Expires?
If the SALT cap is allowed to expire at the end of 2025, SALT taxes would be fully deductible on IRS form Schedule A, where individual taxpayers typically itemize deductions.
What Are the Best SALT Strategies for Airbnb Hosts in High-Tax States?
SALT limitations are especially hard in California, New Jersey and other high-tax states. With over 300,000 Airbnb rentals in California alone, Airbnb hosts should know how SALT limitations affect them.
Mixed-use or shared-use properties will need to allocate their expenses between personal and business use. You have several options for allocating shared expenses, like real estate taxes and mortgage interest.
If the property serves as a vacation home and a rental, allocate the expenses according to business versus personal use. If only a portion of the property is used as a rental, you have more flexibility in allocating expenses.
While still following acceptable standards, you should consider the SALT limitation when deciding what portion of the expenses are allocated to the rental part of the property. The portion of the real estate taxes that are allocated to the rental are not subject to the $10,000 cap on property taxes.
Closing Thoughts on the SALT Deduction
Until 2025, the SALT deduction is limited to $10,000. Homeowners should carefully consider how the cap affects their itemized deductions. Airbnb hosts must determine the best way to allocate their expenses.
If you find the rules confusing, the professionals working at Shared Tax Economy can help you sort through the rules and maximize your deductions.
More Tax Tips for Airbnb Hosts
Shared Economy Tax specializes in taxes for Airbnb hosts and other sharing economy professionals. Our team knows the short-term rental business like the back of their hand, and we can help you develop effective tax strategies for you and your business. Contact us today to set up a one-on-one strategy session with one of our veteran tax pros, and find out how much you can save.
