SALT Deduction Stalemate: A Playbook for Profiting in Real Estate and Regional Banks

The fate of the $10,000 state and local tax (SALT) deduction cap—set to expire in December 2025—is now a high-stakes legislative battle. As House Republicans clash over whether to raise the cap to $30,000 or let it lapse, investors must prepare for a landscape where high-tax states face economic headwinds. This uncertainty creates clear sector-specific opportunities: short regional banks tied to states like New York and California while pivoting to low-tax state infrastructure bonds and mortgage REITs. Here’s why the clock is ticking—and how to act before it’s too late.

The SALT Stalemate: A Double-Edged Sword for High-Tax States

The SALT deduction cap, enacted in 2017, limits itemized deductions for state and local taxes. While it initially aimed to reduce tax avoidance, it has disproportionately burdened taxpayers in high-tax states like New York, California, and New Jersey. Over 40% of the top 50 congressional districts by SALT deduction disparity are in these states.

The problem? If Congress fails to raise the cap, middle- and upper-middle-class households in these regions will lose a critical tax break. This could reduce disposable income by thousands of dollars annually, dampening consumer spending and property valuations.

The ripple effect? Regional banks in these states—reliant on local mortgages and business loans—would face loan defaults, stagnant growth, and declining asset quality. shows vulnerabilities even now, as uncertainty lingers.

Short Regional Banks Exposed to High-Tax States

Investors should consider shorting regional banks with significant exposure to New York, California, and other high-tax jurisdictions. These institutions, such as Zions Bancorp (ZION) and KeyCorp (KEY), face dual risks:

1. Reduced Consumer Spending: Lower post-tax income could slow mortgage refinancing and home purchases, hurting loan volumes.
2. Asset Quality Risks: A prolonged stalemate could push already strained homeowners into delinquency, particularly in high-cost cities like San Francisco or Manhattan.

Trade Idea: Short the KBW Regional Banking Index ETF (KBWR) as legislative delays persist. The index has underperformed broader markets in 2024, and volatility will rise as the December 2025 deadline nears.

Long Low-Tax State Infrastructure Bonds: A Safer Harbor

While high-tax states grapple with fiscal uncertainty, low-tax states like Texas, Florida, and Tennessee are primed for growth. Their economies, less reliant on SALT deductions, offer safer investments.

The play? Buy municipal bonds issued by these states, which fund infrastructure projects and offer tax-free yields. While direct bond purchases require expertise, investors can access this sector via the iShares National Muni Bond ETF (MUB).

reveals a narrowing gap, signaling a value opportunity. Low-tax state issuers are also less likely to face budget shortfalls tied to SALT-related revenue shifts.

Mortgage REITs: Stability in a Volatile Rate Environment

Mortgage real estate investment trusts (REITs) like American Capital Agency (AGNC) and Annaly Capital Management (NLY) thrive when interest rates stabilize—a likely outcome if SALT uncertainty freezes Federal Reserve policy.

Why now? The Fed is unlikely to raise rates aggressively while Congress debates tax changes that could impact growth. Stable rates reduce prepayment risks for mortgage-backed securities (MBS), the core of these REITs’ portfolios.

shows resilience despite broader market volatility. With yields above 10%, these REITs offer both income and capital appreciation potential.

Act Now—Before the Clock Runs Out

The December 2025 SALT deadline is a self-imposed cliff. With negotiations stalled and fiscal conservatives pushing to keep the cap, investors must act before legislative inertia triggers market moves.

Final Recommendations:
- Short KBWR to profit from regional bank underperformance.
- Buy MUB to capitalize on low-tax state infrastructure growth.
- Hold AGNC and NLY to benefit from stable rates and MBS valuation.

Time is running out. As Congress dithers, the markets will price in the risks—and opportunities—long before the clock strikes zero.

Investment decisions should be made in consultation with a financial advisor. Past performance does not guarantee future results.