Deductions and Credits · Itemized deductions and QBI

Various taxes

Verification 2026 Verified
tax year · reviewed 2026-08-19 · Draft for I. Ohu review

Three things about this section are widely stated wrongly. The cap is no longer the figure most sources quote, and it changes every year to 2029 before reverting. Foreign real property taxes are not merely capped — they are removed from the deduction entirely. And the cap does not reach everything: foreign income taxes and business property taxes sit outside it altogether. The section’s own heading, meanwhile, still says the limitation applies “for taxable years 2018 through 2025”, which its text no longer does.

The rule

Four categories are deductible. State and local, and foreign, real property taxes; State and local personal property taxes; State and local, and foreign, income, war profits and excess profits taxes; and the generation-skipping transfer tax on income distributions (IRC § 164(a)(1)–(4)).

Plus business taxes, with one redirection. Any other State, local or foreign tax paid or accrued in carrying on a trade or business or an activity described in § 212 is also deductible — but a tax paid in connection with an acquisition or disposition of property is treated as part of the cost of the property acquired, or as a reduction in the amount realised on a disposition (IRC § 164(a), flush text).

An election, not an addition. At the taxpayer’s election, § 164(a) is applied without regard to State and local income taxes and as if State and local general sales taxes were listed instead (IRC § 164(b)(5)(A)). One or the other.

Foreign real property taxes are out for individuals. For an individual, foreign real property taxes shall not be taken into account under § 164(a)(1) (IRC § 164(b)(6)(A)). There is no cap to reach and no partial allowance.

And the rest is capped. The aggregate of the taxes taken into account under § 164(a)(1), (2) and (3) and the elected sales taxes may not exceed the applicable limitation amount, halved for a married individual filing separately (IRC § 164(b)(6)(B)).

But the cap has two carve-outs. The limitation does not apply to foreign taxes described in § 164(a)(3) — foreign income taxes — nor to real property or personal property taxes paid or accrued in carrying on a trade or business or a § 212 activity (IRC § 164(b)(6), sentence following subparagraph (B)). A landlord’s property tax on a rental is outside the cap; the same tax on their home is inside it.

The applicable limitation amount is a schedule, not a figure. It is set separately for 2025 and 2026, rises by 1 percent a year for years beginning after 2026 and before 2030, and then reverts to its pre-2025 level for any taxable year beginning after 2029 (IRC § 164(b)(7)(A)(i)–(iv)). The amounts are in the table below.

And it phases down at higher incomes. For a taxable year beginning before 1 January 2030, the applicable limitation amount is reduced by 30 percent of the excess of modified adjusted gross income over the threshold amount, halved for a married individual filing separately (IRC § 164(b)(7)(B)(i)).

On a sale, the tax is apportioned by statute. So much of the real property tax as is allocable to the part of the real property tax year ending on the day before the date of sale is treated as imposed on the seller, and the part beginning on the date of sale on the purchaser (IRC § 164(d)(1)). This governs regardless of who actually wrote the cheque; and a cash-method taxpayer not liable under State law is treated as having paid their apportioned share on the date of sale (§ 164(d)(2)(A)).

Current figures

Item	2026
What is deductible	State and local and foreign real property taxes; State and local personal property taxes; State and local and foreign income, war profits and excess profits taxes; and the generation-skipping transfer tax on income distributions^TY2026
Business taxes	any other State, local or foreign tax paid or accrued in carrying on a trade or business or an IRC § 212 activity is also deductible — but a tax paid in connection with an acquisition or disposition of property is capitalised into cost or reduces the amount realised instead^TY2026
Sales tax election	at the taxpayer's election, State and local general sales taxes are substituted for State and local income taxes — one or the other, never both^TY2026
Foreign real property taxes	not deductible at all for an individual — foreign real property taxes are excluded from IRC § 164(a)(1) by § 164(b)(6)(A), with no cap to reach^TY2026
The cap	$40,400 for a taxable year beginning in 2026, halved for a married individual filing separately — rising by 1 percent a year through 2029 and reverting to $10,000 for taxable years beginning after 2029^TY2026
What the cap reaches	the cap applies to the aggregate of real property, personal property and income taxes and elected sales taxes — but not to foreign income taxes under § 164(a)(3), nor to real or personal property taxes paid in carrying on a trade or business or an IRC § 212 activity^TY2026
The schedule to 2029 and after	$40,000 for 2025, $40,400 for 2026, then 101 percent of the preceding year's figure for 2027 through 2029, and $10,000 for any taxable year beginning after 2029^TY2026
Phasedown	reduced by 30 percent of modified adjusted gross income above $505,000 for 2026, halved for a married individual filing separately, but never reduced below $10,000^TY2026
Threshold	$505,000 of modified adjusted gross income for 2026 (half that on a married filing separate return), above which the cap falls by 30 cents on the dollar but never below $10,000^TY2026
Apportionment on a sale	on a sale, the tax allocable to the part of the real property tax year ending the day before the sale is treated as imposed on the seller, and the part beginning on the date of sale on the purchaser — regardless of who actually paid^TY2026
Cash-method sellers and buyers	a cash-method taxpayer who is not liable for the tax under State law is nevertheless treated as having paid, on the date of sale, the portion apportioned to them^TY2026

How it works in practice

Sort the taxes into three piles before applying anything. Foreign real property taxes go straight in the bin for an individual. Taxes paid in a trade or business or a § 212 activity — the property tax on a rental, the personal property tax on business equipment — and foreign income taxes go into a pile the cap never touches. What is left is the capped pile, and only that is measured against the applicable limitation amount.

Then decide the sales tax election. It substitutes for income taxes rather than adding to them, so it is worth considering only where State income tax is low or absent, or where a large purchase has generated unusual sales tax. And note that the election feeds the same capped pile, so in a high-property-tax State it may make no difference at all.

On a sale of real property, apportion first and ask who paid second. Section 164(d) allocates the tax between the parties by the calendar, and the closing statement’s allocation is a contractual matter that does not change the tax result. Count the seller’s days as those ending the day before the sale — the day of sale itself belongs to the purchaser.

Finally, keep the schedule in view. The cap rises modestly each year to 2029 and then falls back sharply, so multi-year planning around the deduction has a cliff in it that is already legislated.

Scenario 1 — the vacation home abroad

Uma pays 8,000 dollars of real estate tax on her home in the United States and 3,000 dollars on a holiday house in another country.

Only the 8,000 dollars is deductible, and it is well inside the 2026 cap. The 3,000 dollars is not capped; it is excluded by IRC § 164(b)(6)(A), which provides that foreign real property taxes are not taken into account under § 164(a)(1) for an individual at all. Had she instead paid 3,000 dollars of foreign income tax, that would have been deductible and outside the cap entirely — or creditable under § 901.

Scenario 2 — the landlord and the homeowner

Viktor pays 14,000 dollars of property tax on the house he lives in and 19,000 dollars on three rental properties, plus 21,000 dollars of State income tax. His income is below the phasedown threshold.

The 19,000 dollars is paid in carrying on a trade or business, so the sentence following IRC § 164(b)(6)(B) keeps it outside the cap entirely — it is deducted in full on Schedule E. The 14,000 and 21,000 dollars form the capped pile of 35,000 dollars, which is inside the 2026 applicable limitation amount. Splitting the piles correctly is worth more than any planning: treating the rental taxes as part of the capped pile would have thrown away most of the deduction.

Scenario 3 — the seller who paid the whole year

Wren sells her house on the 225th day of the year, having already paid the full 4,500-dollar annual property tax in June.

IRC § 164(d)(1)(A) treats her as bearing the tax allocable to the part of the year ending the day before the sale — 224 days — so 224/365 of 4,500 dollars, about 2,762 dollars, is her deduction. The remaining portion is treated as imposed on the purchaser under § 164(d)(1)(B), even though Wren paid it, and the purchaser deducts it. The closing statement will usually reimburse her; the tax result does not depend on whether it does.

Foreign real property tax is excluded, not capped. IRC § 164(b)(6)(A) removes it from § 164(a)(1) entirely for individuals.

Foreign income taxes are outside the cap, by the sentence following § 164(b)(6)(B) — and may be creditable instead.

Business and § 212 property taxes are outside the cap too. The rental property tax is not part of the capped pile.

The seller’s share ends the day before the sale. Section 164(d)(1)(A) gives the day of sale to the purchaser.

How this has changed

The cap was rebuilt in 2025 and the section’s own heading was not updated. Paragraph (6) is still headed “Limitation on individual deductions for taxable years 2018 through 2025”, while its text now reads on any taxable year beginning after 31 December 2017 with no closing date, and a new paragraph (7) supplies a schedule of amounts running to 2029 and beyond. The heading contradicts the text, and this is one of three drafting artefacts in Pub. L. 119-21 recorded on this site. Anyone reading the heading alone will conclude the limitation expired; it did not.

The amount is no longer a single figure. It rises between 2025 and 2026, then by 1 percent a year to 2029, and reverts to the old level for taxable years beginning after 2029 (IRC § 164(b)(7)(A)). Every source still quoting the old cap as current is describing 2030 onwards, and every source quoting the 2025 figure is describing that year only.

A phasedown was added with it. Section 164(b)(7)(B) reduces the applicable limitation amount by 30 percent of modified adjusted gross income above a threshold, for taxable years beginning before 2030. This is new: between 2018 and 2024 the cap did not vary with income at all.

One consequence is easy to miss. A larger cap means more State and local tax is actually deducted, which in turn means more of a later State tax refund is includible under the tax benefit rule. Between 2018 and 2024 a great many taxpayers whose deduction was fully absorbed by the old cap could exclude their refunds automatically. That shortcut is gone for as long as the higher cap lasts.

Exam focus

Expect a foreign real property tax in the facts, testing whether you cap it or exclude it. Exclude it.

Expect rental or business property taxes mixed with personal ones, testing the carve-out.

Expect the cap amount, which is year-specific — read the taxable year in the question before answering.

Expect an apportionment computation with a sale date, where the seller’s days end the day before the sale.

Check yourself

1. An individual pays 6,000 dollars of foreign real property tax on a second home abroad. How much is deductible?

Answer: None. IRC § 164(b)(6)(A) provides that foreign real property taxes are not taken into account under § 164(a)(1) for an individual — the amount is excluded rather than capped.

2. A taxpayer pays 30,000 dollars of property tax on rental properties and 12,000 dollars on their home. Which amounts are subject to the cap?

Answer: Only the 12,000 dollars. The sentence following IRC § 164(b)(6)(B) excludes taxes described in § 164(a)(1) and (2) that are paid or accrued in carrying on a trade or business or a § 212 activity.

3. May a taxpayer deduct both State income tax and State general sales tax?

Answer: No. IRC § 164(b)(5)(A) applies § 164(a) without regard to State and local income taxes and as if general sales taxes were listed instead — the election substitutes one for the other.

4. What governs the applicable limitation amount for a taxable year beginning in 2031?

Answer: IRC § 164(b)(7)(A)(iv), which reverts the amount to its pre-2025 level for any taxable year beginning after calendar year 2029 — the annual 1 percent increases in clause (iii) run only to 2029.

5. A property is sold on 1 October. Who deducts the tax for 30 September and for 1 October?

Answer: The seller deducts the portion allocable to 30 September, under IRC § 164(d)(1)(A), which runs to the day before the sale; the purchaser deducts the portion allocable to 1 October under § 164(d)(1)(B).

Change log

2026-08-19Initial draft. Sets out the four IRC § 164(a) categories and the flush-text rule for business taxes, the § 164(b)(5) sales tax election, the § 164(b)(6) limitation with its exclusion of foreign real property taxes and its carve-outs for foreign income taxes and business property taxes, the § 164(b)(7) schedule of applicable limitation amounts through 2029 and beyond, and the § 164(d) apportionment on a sale.