Taxpayer asks:
Dear Taxgirl,
Does the $10k SALT limit includes Property Taxes on vacation (not rental) property?
Taxgirl says:
I’ve received a couple of variations on this question. I’ll answer your question first and then dive into the secondary issue.
The short answer to your question is yes, the cap applies under those facts.
This is a different result than the question for rentals. Let me explain.
The applicable section of the new tax law, as before, is 11042, which states, in part:
…the aggregate amount of taxes taken into account under paragraphs (1), (2), and (3) of subsection (a) and paragraph (5) of this subsection for for any taxable year shall not exceed $10,000 ($5,000 in the case of a married individual filing a separate return).
(emphasis added)
That means that section 164 of the Tax Code is amended to cap the aggregate of certain state and local taxes, including real estate taxes. But taxes relating to rentals are exempt from the cap because they are related to a trade or business or an activity described in section 212 (production or collection of income).
A vacation (not rental) property is not a business and is not used to produce income, which means that it’s not exempt and it is subject to the cap. The cap applies to the total of those state and local taxes claimed on a Schedule A – and that’s where you would report property taxes on vacation (not rental) property.
That brings me to a popular variation on the question: Can you throw a vacation (not rental) property into an LLC or other corporation to avoid the cap?
Before I answer that question, let me tell you a story. When I was a little girl, I wanted to be a clog dancer (or clogger) more than anything. My friends were cloggers, and they had these amazing dresses with crinolines underneath that made the dresses stand straight out. I was so envious. I begged my mom to let me take clogging lessons, but we didn’t have that kind of money. I was heartbroken. Instead of lessons, my mom made me a dress – in Kelly green gingham – with a crinoline underneath. It was beautiful. I wore it as often as I could. It was my clogging dress. But as magnificent as that dress was, it didn’t make me a clogger.
You already know where this is going, I’m sure. You can dress up property for personal use in an LLC or other corporation but that alone doesn’t make it a business. Unless you’re going to take steps to formally make it a trade or business – and remember, the Internal Revenue Service (IRS) believes that one of the primary motives of a business should be to make money – you haven’t changed what it is, just what you’re calling it. That’s not good enough. It’s still vacation (not rental) property, and not subject to special tax treatment – just like I was still a poor girl in a clogging dress.
For more on whether incorporation makes sense under the new tax law, click here. And for more on whether incorporation makes sense in your particular set of circumstances, consult with your tax professional.
Before you go: be sure to read my disclaimer. Remember, I’m a lawyer and we love disclaimers.
If you have a question, here’s how to Ask The Taxgirl.
