If your income is greater than $300,000 and the assessed value of your personal
residence that you own is more than $1,000,000, it is still worth taking advantage of the
passthrough entity tax. Even if you are not in this income bracket, it’s interesting to
know how the tax code can affect investment decisions.

Background
     By way of background, the federal passthrough entity tax allows S corporations,
limited liability corporations (LLCs) with multiple owners, and partnerships to deduct
state and local taxes at the entity level, thereby bypassing the $10,000 state and local
tax deduction limit.

     If this sentence made your head spin, you’re not alone. Let me explain why this
matters and how it relates to real estate.
     If you own an S corporation, LLC with multiple owners, or are in a formal
partnership, the income from your corporation (or entity) is “passed through” to you and
you record it as part of your personal income. Before 2018, individuals used to be able
to deduct state income taxes from their federal taxable income. In 2018, Congress
passed the Tax Cuts and Jobs Act, which effectively capped that deduction at $10,000.

     As is so often the case, there were political motivations at play. The federal government
was at war with high-income states like California and New York.

     As of 2025, the One Big Beautiful Bill Act has raised the cap to $40,000. So the
question becomes, should your company pay the passthrough entity tax or should you
just pass the income to your personal account and pay the commensurate personal
income tax?

Pass-Through Entity Tax Strategy Still Valuable
     Despite the increased cap, the passthrough entity tax strategy remains beneficial
for many taxpayers. When paid at business level, these taxes are fully deductible
against federal income, so they are not subject to state and local tax cap. Whereas,when passed through to personal returns, the deduction is capped at $40,000 combined
with property taxes.

     Let’s say your company has taxable income of $2 million and therefore, a state
income tax liability of $200,000 (using very round numbers). If you pass that $2 million
profit on to your individual tax return, you're only going to be able to deduct $40,000
from the combined total of your state income taxes and your property taxes. However,
by paying taxes through the business, you can now deduct $200,000 against your
federally taxable income.

     So, if you own a business or other income-producing assets, owning them with
an S-corp or a multi-party LLC can save you big bucks. Although I highly recommend
investing in real estate, it generally serves as a tax shelter, lowering your tax burden, as
opposed to creating taxable income. However, if you’ve owned a particular parcel for a
long time and you’ve fully depreciated it, you’ll earn income by renting it out. Because
rents have increased so much over time, the income will be much higher than it was
when you purchased the property. This would make your property a revenue-generating
asset.

     If you’re curious about how to use depreciation as a tax shelter, refer to my
previous article on cost segregation (selzerrealty.com/2023/10/02/to-save-on-taxes-
timing-matters).

    I must remind you that this information and all my columns are intended to pose
questions, not to be taken as advice. Before you make any changes to your financial
strategy, talk with your accountant and attorney. I have no information on your personal
details and would not presume to give financial advice, even if I did.

     If you have questions about property management or real estate, please contact
me at [email protected] or call (707) 462-4000. If you have an idea for a future
column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s
Bakery.

     Dick Selzer is a real estate broker who has been in the business for more than
50 years. The opinions expressed here are his and do not necessarily represent his
affiliated organizations.