How the SALT Deal Could Reshape Regional Real Estate Markets and Your Portfolio

The tentative SALT (State and Local Tax) deduction compromise, now at the heart of U.S. tax policy debates, has profound implications for regional real estate markets. The proposed increase of the SALT cap from $10,000 to $40,000—effective for five years—alongside phase-outs for high earners and restrictions on pass-through entity workarounds, could reconfigure investment valuations and diversification strategies. For investors, understanding how these changes intersect with tax burdens, geographic demand, and federal fiscal dynamics is critical to navigating this evolving landscape.

The SALT Deal's Impact on Regional Real Estate Valuations

High-Tax States Get a Reprieve (For Now)
The SALT deduction cap's reduction in 2017 under the TCJA (Tax Cuts and Jobs Act) was a body blow to homeowners in states like New York, California, and New Jersey, where high property taxes and income levies made the $10,000 limit punitive. The new $40,000 cap, phased out for incomes above $500,000, could reverse this trend. For middle- and upper-middle-class households in these states, the tax savings could reduce effective tax rates by 1–3%, reigniting demand for high-end residential properties.

The math is straightforward: a couple earning $300,000 in New York, paying $25,000 in state/local taxes, would previously have been unable to deduct $15,000 of that amount. With the $40,000 cap, they can now fully deduct those taxes, saving roughly $5,000 in federal taxes annually. This could translate to higher price tolerance for homes in high-tax regions, particularly in urban centers where property taxes are steepest.

However, the phase-out for incomes above $500,000 means ultra-high-net-worth individuals (UHNWIs) in these states—already grappling with state-level wealth taxes—might see diminishing returns. This could steer UHNWIs toward tax-advantaged regions or international markets, creating a bifurcated real estate market.

Regional Market Shifts: Winners and Losers

Winners:
- Coastal Urban Markets: Cities like San Francisco, New York, and Boston, where high property taxes and income levies previously deterred buyers, stand to gain.
- Suburban and Exurban Enclaves: Wealthy households in high-tax states may opt for larger homes with higher property taxes, leveraging the SALT deduction.

Losers:
- Low-Tax Sun Belt Markets: States like Florida and Texas, which saw a migration boom during the TCJA era, may lose some of their luster.
- Pass-Through Entity-Heavy Sectors: Real estate professionals, law firms, and financial services firms in high-tax states could face higher federal taxes due to restrictions on entity-level deductions, potentially slowing commercial real estate demand.

Diversification Strategies: Balancing Risk and Reward

1. Overweight High-Tax State Real Estate—Strategically
Investors should consider allocating to high-tax state markets with strong fundamentals (e.g., job growth in tech hubs like NYC or Austin). However, avoid overconcentration:

2. Leverage REITs for Liquidity
Real estate investment trusts (REITs) like Equity Residential (EQR) or Prologis (PLD) offer exposure to regional markets without the illiquidity of direct property ownership. Focus on diversified portfolios or those with exposure to multifamily housing, which tends to outperform in urban rebound scenarios.

3. Hedge with Low-Tax State Alternatives
Maintain a portion of your portfolio in states like Nevada or South Dakota, which offer no income tax and lower property levies. This buffers against the SALT deal's temporary nature (the $40,000 cap expires in 2030).

4. Monitor Pass-Through Entity Risks
Commercial real estate tied to industries like legal services or finance in high-tax states may face higher operational costs. Investors should favor sectors with built-in inflation hedges, such as industrial or logistics properties.

Risks and Considerations

Political Uncertainty: The SALT deal's five-year window creates a “use it or lose it” dynamic. Investors must be prepared for potential rollbacks or extensions depending on 2026 election outcomes.

Fiscal Sustainability: The $40,000 cap is projected to cost $660 billion over 10 years compared to the $10,000 cap. If deficit concerns resurface, Congress might revisit these provisions, destabilizing markets.

Pass-Through Restrictions: The disallowance of entity-level deductions for “specified service trades” could indirectly hurt commercial real estate in high-tax states by increasing operating costs for businesses renting office space.

Investment Recommendations

• Aggressive Strategy: Allocate 20–30% of your real estate portfolio to high-tax state markets (e.g., multifamily in NYC or tech hubs in CA). Pair with a 10–15% stake in national REITs.
• Conservative Strategy: Limit exposure to 10–15% in high-tax regions, emphasizing low-risk sectors like student housing or healthcare facilities. Diversify the rest into low-tax state real estate and REITs.
• Monitor Federal Policy: Track developments on the SALT cap's sunset date and any changes to pass-through entity rules.

Conclusion

The SALT deal's temporary boost to high-tax state real estate markets offers a strategic window for investors, but it's a double-edged sword. While affluent buyers in regions like NYC and the Bay Area may see improved affordability, the expiration date and political risks demand caution. Diversification—geographically and by asset class—remains key. For now, the pendulum swings toward high-tax states, but prudent investors will keep one eye on the fiscal calendar and the next on Capitol Hill.