The $40,000 SALT Deduction You Lose Above $500K of Income in a Sale Year

This page is one part of our beyond the tax bill series: the costs a sale triggers that do not show up as "capital gains tax."

What is the new SALT cap, year by year?

IRC §164(b)(6) limits how much state income tax, property tax and similar taxes an individual can deduct. P.L. 119-21 §70120 replaced the old flat $10,000 with an "applicable limitation amount" in IRC §164(b)(7):

The 2027 to 2029 figures are 101% of the prior year, as the statute says; the statute has no rounding rule, and the IRS has not yet published its 2027 figures, so treat those as our estimates.

Three details matter for sellers:

• The phase-down. The cap is reduced by 30% of modified AGI over the threshold, but never below $10,000 (§164(b)(7)(B)). In 2026 a joint return hits the $10,000 floor at about $606,333 of modified AGI. Between $505,000 and roughly $606,000, every extra dollar of income costs 30 cents of deduction.
• Married couples get the same numbers as single filers. The $40,400 cap and the $505,000 threshold are not doubled for a joint return. Married filing separately halves both: a $20,200 cap, a $252,500 threshold and, in effect, a $5,000 floor.
• Modified AGI here is AGI plus any foreign earned income or possession exclusions (§164(b)(7)(B)(iv)). Your whole recognized gain counts.

Does this even matter to you?

Only if you itemize. The 2026 standard deduction is $32,200 for a married couple, plus $1,650 for each spouse 65 or older ($2,050 for a single filer 65 or older), per Rev. Proc. 2025-32. If your property tax, mortgage interest and charity already beat that, the SALT cap is a live number. If you take the standard deduction every year, skip this page.

For a California seller who itemizes, the sale makes the issue worse and better at once. Worse, because the gain pushes modified AGI far over $505,000. Better, because the state tax on the sale is itself a deductible state income tax: in the sale year you will have far more SALT paid than any cap allows. The cap, not the amount paid, becomes the only thing that moves.

When does the sale's own state tax count?

State income tax is deductible in the year you pay it (§164(a)). Estimated payments made during the sale year count in the sale year. A balance paid with the return the following April counts in the following year, when your income, and so your cap, may be back to normal. That timing can be worth something, but it has to be weighed against state estimated-tax penalty rules. Have your CPA decide how much to pay and when. Our engine assumes the sale's state tax is paid in the sale year.

What does losing the deduction actually cost?

Here is a California married couple who itemize: $250,000 of ordinary income, $30,000 of property tax, $24,000 of mortgage interest, $15,000 of charity. We add a capital gain in 2026 and measure the extra federal tax caused only by the smaller SALT cap. Engine estimates, 2026 law:

Two things stand out. The cost tops out in the high single thousands, because the most you can lose is about $30,400 of deduction. And at $2,000,000 of AGI the cost drops to $1,438.

Why does the AMT absorb the cost in a big cash sale?

The alternative minimum tax never allowed a deduction for state and local taxes (IRC §56(b)(1)(A)(ii)). At $2,000,000 of AGI this couple is already paying $21,118 of AMT, so part of the SALT deduction the regular tax takes away was never worth anything to them in the first place. The AMT exemption itself also phases out faster from 2026 ($140,200 for a joint return, reduced by 50% of AMT income over $1,000,000, per Rev. Proc. 2025-32). See AMT on a property sale for how that works.

Two other 2026 rules sit in the same Schedule A:

• The new §68 limit. Once taxable income reaches the 37% bracket ($768,700 for a joint return in 2026), itemized deductions are cut by 2/37 of the lesser of those deductions or your taxable income (counted before itemized deductions) above that line (IRC §68). In the table that cut is $2,378 of deduction at $1,000,000 of AGI.
• The 0.5% charity floor. From 2026 only the charity above 0.5% of your contribution base counts (IRC §170(b)(1)(I)). At $2,000,000 of AGI, the first $10,000 of giving deducts nothing.

Does spreading the sale over several years help here?

Not automatically, and this is where we want to be plain. Spreading a sale cuts the tax on the gain. On the SALT line it can do the opposite.

Take the same couple selling for $2,500,000 in California: $500,000 basis, $150,000 of costs, $250,000 of other income. Engine estimates, cash sale in 2026 against a 10-year structured installment sale at a 5% payout rate (both sides earn 5% on money at work):

The cash seller loses the deduction once, in a year when the AMT soaks up most of it. The spread seller sits between roughly $510,000 and $620,000 of AGI in each of the four years the phase-down exists, and pays a little every year. The spread still comes out about $142,700 ahead on the tax bill, so the SALT line does not change the answer here; it just narrows it by about $7,300. From 2030 the cap is a flat $10,000 for everyone, so there is nothing left to lose.

What is the lever?

Size each year's income against the line. The phase-down only exists from 2025 through 2029, and only above $505,000 (2026). If a payment schedule keeps modified AGI under the threshold in those years, the full cap survives. Running the same sale through the engine with longer schedules:

The first year carries the most interest, which is why only 2026 costs anything on the longer schedules. The other honest option: accept it. A few thousand dollars of lost deduction should never be the reason to pick a schedule. It is one line to check alongside IRMAA, the 3.8% net investment income tax and your state's brackets.

What to know about a structured installment sale: the payments are locked in once set; they depend on the assignment company and the insurer behind it; there is no published IRS ruling on this specific assignment structure, so have your CPA review it; and a commission is built into the pricing.

What about a pass-through entity tax election?

If you sell through a partnership or S corporation, the entity may be able to pay state income tax at the entity level. Under IRS Notice 2020-75, that payment is deducted by the entity and "is not taken into account in applying the SALT deduction limitation" to the owners. P.L. 119-21 rewrote the individual cap in §164(b)(6) and (7) but added no limit on entity-level taxes. California renewed its elective tax for tax years 2026 through 2030 (R&TC §19910, added by SB 132, operative because the federal cap was extended, per §19916). Whether sale gain qualifies and whether the election pays depends on your entity and your state. This is a question for your CPA before closing, not after.

Frequently asked

Q: What is the SALT cap for 2026? A: $40,400 for single and joint filers ($20,200 married filing separately), reduced by 30% of modified AGI over $505,000, but not below $10,000 (IRC §164(b)(7)).

Q: At what income do I lose the full $40,400? A: For 2026, the cap reaches the $10,000 floor at about $606,333 of modified AGI. Above that it stays at $10,000.

Q: Is the state tax I pay on my sale deductible? A: Yes, as a state income tax, in the year you pay it, subject to the cap. In a sale year the cap is almost always the limit, not the amount paid.

Q: Why is my SALT cost so small in a huge sale year? A: The alternative minimum tax does not allow the SALT deduction at all. If you already owe AMT, much of the lost deduction was not helping you anyway.

Q: Does an installment sale protect my SALT deduction? A: Only if each year's modified AGI stays under the threshold. A schedule that keeps you between about $505,000 and $1,000,000 through 2029 can lose part of the deduction every year. Check the numbers, then decide.

Q: What happens in 2030? A: The cap returns to a flat $10,000 with no phase-down, so income no longer affects it.

What should you read or run next?

• Beyond the tax bill: the full series
• Run your sale in the calculator: the "Beyond the tax bill" slide shows the SALT cost year by year
• AMT on a property sale
• IRMAA after a property sale
• High-income structured installment sales
• California capital gains tax calculator
• California's top brackets and 2031

Illustrative estimates using 2026 law. Not tax, legal or accounting advice. Figures change each year; have your CPA confirm with your own return.

Who wrote this?