US SALT Cap Raised to $40K: What It Means for Americans with Cabo Property

The SALT deduction for Cabo property owners just became relevant again for the first time since 2017. The One Big Beautiful Bill Act, signed into law in 2026, raised the state and local tax (SALT) deduction cap from $10,000 to $40,000 for married couples filing jointly. But the bigger news for Americans owning property in Mexico is what happened alongside that cap increase: the foreign real estate tax deduction, suspended under the Tax Cuts and Jobs Act from 2018 through 2025, has been restored. If you own a condo in Chileno Bay or a villa in Palmilla, your Mexico property taxes are deductible on your US federal return again.

What Actually Changed in 2026

The Tax Cuts and Jobs Act of 2017 did two things that hurt Americans with foreign property. First, it capped the SALT deduction at $10,000 ($5,000 for married filing separately). Second, it specifically excluded foreign real property taxes from the SALT deduction — even if you had room under the cap. From 2018 through 2025, your Mexico predial tax was a phantom expense on your US return: you paid it, but you got zero federal tax benefit from it.

The One Big Beautiful Bill Act reverses both. The cap goes to $40,000 for married filing jointly ($20,000 single), and the foreign real estate tax exclusion is removed. Your Mexico property taxes now stack alongside your US state income taxes, property taxes, and local taxes within the new $40,000 limit.

Which Mexico Taxes Qualify

Based on IRS guidance on foreign tax credits and deductions, the Mexico taxes most likely to qualify as deductible foreign real property taxes include:

• Predial (annual property tax): This is Mexico's equivalent of US property tax. Assessed by the municipality, based on catastral value. In Los Cabos, predial on a $1M property typically runs $1,500–$3,000 per year. Clearly deductible.
• ISABI (acquisition tax): Assessed at the time of purchase, typically 2–3% of catastral value in Baja California Sur. Whether this qualifies as a "property tax" or a "transfer tax" matters — transfer taxes are generally not deductible as SALT. Consult your CPA on classification.
• State-level surcharges: BCS occasionally levies additional surcharges on property-related transactions. Deductibility depends on characterization.

What does NOT qualify: fideicomiso annual trust fees (these are bank service charges, not taxes), HOA fees, and notario costs.

Practical Examples: How Much You Save

Let me walk through two real-world scenarios using approximate numbers from clients I work with in Pedregal and Cabo del Sol.

In Scenario A, the entire $27,800 in SALT — including the Mexico predial — fits under the $40K cap. At a 32% marginal federal rate, that is an additional $5,696 in tax savings compared to the old $10K cap. The Mexico predial alone saves $576 in federal tax that was completely unavailable from 2018 through 2025.

In Scenario B, the total SALT of $54,500 exceeds the $40K cap, so $14,500 remains non-deductible. But the improvement over the old $10K cap is still dramatic: $30,000 in additional deductions, worth $9,600 at a 32% rate. The Mexico predial contributes to the total even though the cap binds — it displaces higher-taxed US state income taxes that would otherwise have been the first to be cut off.

Rental Properties: A Different Calculation

If your Cabo property is a dedicated rental — reported on Schedule E — the SALT cap does not apply to the property taxes. Property taxes on rental real estate are deducted as a business expense on Schedule E, not as an itemized deduction on Schedule A. This was true before and remains true now.

The SALT change matters most for:

• Personal-use vacation homes: Property used primarily by the owner and not rented, or rented fewer than 15 days per year
• Mixed-use properties: Property used personally and rented, where deductions are allocated between Schedule E (rental portion) and Schedule A (personal portion)
• Second homes: Property designated as a second home for mortgage interest deduction purposes

For most Cabo property owners who rent their property part-time, the predial allocation between Schedule E and Schedule A depends on the ratio of rental days to personal-use days. Your CPA handles this calculation, but the point is: the SALT change benefits the personal-use portion of your property taxes, not the rental portion (which was always deductible).

The AMT Complication

The alternative minimum tax remains a factor for high-income filers. Under AMT rules, state and local tax deductions — including foreign real property taxes — are added back to taxable income when computing AMT. If you are already in AMT territory, the increased SALT cap may provide less benefit than the headline numbers suggest.

The good news: the AMT exemption amounts were also adjusted upward for 2026. For married filing jointly, the exemption is approximately $133,300 (indexed for inflation). The phase-out threshold is approximately $1,218,700. If your taxable income before AMT adjustments is below the phase-out, the restored SALT deduction likely flows through to real tax savings. Above it, the benefit diminishes.

This is precisely why I say "run the numbers" rather than celebrate the headline. For a couple earning $350,000 with a $1.5M home in California and a $1M condo in Cabo, the SALT increase is a clear win. For a couple earning $2M+, the AMT interaction may absorb much of the benefit. Your CPA can model both scenarios in thirty minutes.

SALT Deduction vs. Foreign Tax Credit

Do not confuse the SALT deduction for foreign property taxes with the foreign tax credit (FTC). These are different mechanisms:

• SALT deduction (Schedule A): Reduces your US taxable income by the amount of qualifying state, local, and foreign property taxes paid, up to the $40K cap. You get a benefit at your marginal rate.
• Foreign tax credit (Form 1116): A dollar-for-dollar credit against US tax liability for foreign income taxes paid. Applies to Mexico's ISR (income tax) on rental income, not to property taxes.

If you pay Mexico ISR on rental income from your Cabo property, you claim that as a foreign tax credit. If you pay Mexico predial (property tax) on the same property, you deduct that as SALT. You cannot double-dip — each Mexico tax goes to one mechanism or the other. For a deeper look at the overall US tax picture for Cabo property, see our guide on US tax obligations for Cabo property owners.

What to Do Before December 31, 2026

The SALT changes take effect for the 2026 tax year. Here is your pre-year-end checklist:

• Pay your Mexico predial before year-end. BCS municipalities typically offer a 10–15% early-payment discount in January and February, but for US tax purposes, the deduction is claimed in the year the tax is paid. If you have not paid your 2026 predial yet, do so before December 31 to capture it on your 2026 return.
• Gather all Mexico tax receipts. Your predial payment receipt (recibo de pago del impuesto predial) from the Los Cabos municipality is the documentation you need. If you pay through a property manager, request the original receipt.
• Review your SALT total with your CPA. Add your US state income taxes, US property taxes, and Mexico predial. If the total is under $40K, you deduct it all. If it exceeds $40K, your CPA should optimize which taxes to allocate where.
• Consider prepaying 2027 Mexico predial. If you have headroom under the $40K cap in 2026 and expect to exceed it in 2027, prepaying next year's predial in December 2026 shifts the deduction to the year where it provides more benefit. Municipalities accept early payment — they love it.
• Flag ISABI for your CPA. If you purchased a Cabo property in 2026 and paid ISABI (acquisition tax), ask your CPA whether it qualifies as a deductible property tax or a non-deductible transfer tax under IRS guidance. The characterization matters.

State-Level Interactions

The SALT cap is a federal limitation. Your state may offer additional benefits. California, New York, Texas (no state income tax but high property taxes), and Arizona — the four states that send the most buyers to Cabo — each interact with the federal SALT deduction differently. California and New York filers typically exhaust their SALT cap on state income taxes alone, so the Mexico predial is most likely to be the marginal dollar that gets cut off. For Texas and Arizona filers with lower or zero state income tax, the $40K cap provides ample room for Mexico property taxes.

This is one more reason why the California buyer's guide to Cabo real estate matters. The tax dynamics for a California filer with $30K+ in state income tax are fundamentally different from a Texas filer paying $8K in property taxes and zero state income tax.