PTET and the $40,400 SALT Cap for K-1 Real Estate Fund Investors

This page is for a reader who gets a Schedule K-1 from a real estate fund, a private credit fund or another partnership, lives in a state with a high income tax, and wants to know why the K-1 may show less income than the fund earned in a state tax year, or why a state credit appears on the state return. It does not cover the K-1 boxes themselves, which are in our K-1 boxes explained for real estate fund investors, or which vehicles send a K-1, which is in our K-1 versus 1099-DIV census.

The election belongs to the fund, and the states say so

A PTE tax is a state income tax charged to the partnership or S corporation instead of to its owners, with the owners getting a credit or an exclusion on their own state return. The point of it is federal: the entity can deduct the tax in computing its income, so the amount is not caught by the individual cap. The owner’s decision is limited to asking the sponsor what it did.

What each state agency says about who decides:

• New York: “The PTET is an optional tax that partnerships or New York S corporations may annually elect to pay”, by an authorized person, online, “no later than March 15” of the tax year.
• California: the entity elects on an original, timely filed return, and “A partner, shareholder, or member that does not consent does not prevent the qualified entity from making an election to pay the elective tax.”
• Arizona: the entity must tell individual, estate and trust owners and give them at least 60 days to opt out. “Each individual, estate, trust partner, or shareholder has the right to opt out of this election.”
• Georgia: the entity elects on Form 700 by its due date or extended due date, and the election is binding on all owners, including nonresidents.
• Massachusetts: the election is irrevocable and “binding on all qualified members of the PTE.”
• Connecticut, Illinois, New Jersey, Maryland: the entity elects; the owner is not asked.

Three limits matter to a fund investor. First, publicly traded partnerships are excluded in California, New York, Illinois and Massachusetts, so listed partnership units do not qualify there. Second, the credit may go only to direct partners: New York says “a partner that is itself a partnership is not eligible for the PTET credit and cannot pass the PTET credit through to its partners”. If you invest through a feeder LLC taxed as a partnership, ask whether your state lets the credit through. Third, a fund that had no election in place by the state’s deadline cannot add one later: New York’s page gives no date after March 15, and Massachusetts says the election “may not be made on an amended return.”

What the 2025 law did to the cap, and what it left alone

Public Law 119-21 was signed on July 4, 2025. Section 70120 struck the 2025 end date from section 164(b)(6) and replaced the old $10,000 with an “applicable limitation amount” defined in a new section 164(b)(7). The amendments apply to taxable years beginning after December 31, 2024.

The phase-down is “30 percent of the excess (if any) of the taxpayer’s modified adjusted gross income over the threshold amount”, with half the amounts for a married person filing separately. MAGI here is adjusted gross income plus amounts excluded under sections 911, 931 or 933. The reduction cannot take the limit below $10,000. The 2025 Instructions for Schedule A say the same for 2025: $40,000, reduced when MAGI is more than $500,000, “but will not be reduced below $10,000”.

For 2026, the limit by income level is below (all rows are our arithmetic from the statute):

Above about $606,333 of MAGI, the 2026 cap is the same $10,000 as under the old rule, so a high earner gets no help from the headline $40,400. That is the group for which a PTET payment is worth the most, because the entity’s payment is not counted against the cap at all.

The House draft would have restricted PTET; the enacted law does not

The premise that the law limited PTET is wrong, but the confusion is understandable. The House-passed text of H.R. 1 had a section 112018 with a new section 275(b) cap of $40,400 and a $505,000 threshold, and it went further for partnerships. It would have taken “specified taxes” paid by a partnership into account separately by each partner under section 702(a)(6)(C), disallowed the partnership’s own deduction for them under section 703(a)(2)(B), exempted only an entity with at least 75 percent of gross receipts from a qualified trade or business, and added a new section 6659 charge on a “State and local tax allocation mismatch”. Public Law 119-21 contains none of this. Section 70120 reads, in full effect, as an amendment to section 164(b)(6) and the new paragraph (b)(7); the section 6659 in the enacted law concerns claims for Trump account contributions.

Notice 2020-75: why the entity’s payment sits outside the cap

The IRS announced on November 9, 2020 that it intends to issue proposed regulations, and that taxpayers may rely on the notice meanwhile. Its terms:

• A Specified Income Tax Payment is any amount a partnership or S corporation pays to a state to satisfy an income tax imposed on the entity, and the notice says this holds whether or not the tax results from an election by the entity.
• The entity may deduct the payment in computing its taxable income for the year of payment.
• The payment is not a separately stated deduction for the partner. It is “reflected in a partner’s or an S corporation shareholder’s distributive or pro-rata share of non-separately stated income or loss reported on a Schedule K-1”.
• The payment “is not taken into account in applying the SALT deduction limitation to any individual who is a partner in the partnership”.

The notice cites Revenue Ruling 58-25, which allowed a partnership’s deduction of a Cincinnati tax on its net profits, with the result that the partners’ shares could be used in computing adjusted gross income under section 62, “not as itemized deductions”. That second point is easy to miss: because the payment lowers your share of income, it also lowers your AGI and MAGI, and so can lift the phase-down cap for the itemized state taxes you pay yourself. The next section puts numbers on it.

State rules for the PTE tax: nine agencies read

The table gives the tax, rate, who elects and the deadline, as published by each agency we saved. Rates and rules change by year; the Arizona rate shown is for 2025, and the Georgia FAQ page we saved states no rate.

Colorado, whose SALT Parity Act (SB 22-124) allowed an election for tax years 2022 through 2025, is the one state in our set where we could not confirm the 2026 process: the Department’s pages we saved cover 2022 through 2025 only. Ask the fund directly if it has Colorado income.

36 jurisdictions: New York’s list of similar taxes

New York gives a credit to its residents for another state’s PTE tax that is “substantially similar” to its own, and publishes the list with the statute and the first qualifying year. As of its latest update (March 19, 2024, covering legislation enacted by December 15, 2023) it names 35 states other than New York. By first qualifying tax year, our arithmetic from that list gives 19 states for 2021, 14 for 2022 and 2 for 2023, and New York itself began in 2021.

• 2021: Alabama, Arizona, California, Colorado, Connecticut, Idaho, Illinois, Louisiana, Maryland, Massachusetts, Michigan, Minnesota, Nebraska, New Jersey, Oklahoma, Rhode Island, South Carolina, Virginia, Wisconsin.
• 2022: Arkansas, Georgia, Indiana, Iowa, Kansas, Kentucky, Mississippi, Missouri, New Mexico, North Carolina, Ohio, Oregon, Utah, West Virginia.
• 2023: Hawaii, Montana.

The list is a floor, not a current count: it is dated 2024, and we did not read the agencies of the other 27 states on it (35 less the eight in the table; our arithmetic). Statute citations for every state are in the CSV.

A worked example: where the saving comes from

All numbers in this section are our arithmetic, for a made-up investor, to show the mechanics. The 37% federal rate is an assumption, not a source, and the example ignores other deductions, the 199A deduction and the passive loss rules.

Case 1, MAGI above the floor. A married couple filing jointly have 2026 MAGI of $620,000, including their share of a real estate fund that earns California income. They already pay $15,000 of property tax, so their $10,000 floor is used up. The fund, a partnership that is not publicly traded, elects California’s tax. Their share of qualified net income is $100,000.

• The entity pays 9.3% of $100,000 = $9,300. California’s instructions give the owner a credit of 9.3% of the owner’s share, which is also $9,300, against their California personal income tax.
• Their share of federal income falls by $9,300, so MAGI is $610,700. The cap stays at the $10,000 floor either way, because $610,700 is above $606,333.
• Without the election, the $9,300 of California tax is a tax the couple pay themselves, and with the $10,000 floor already used up by property tax it adds nothing to their federal deduction. With the election, the $9,300 is deducted by the entity, which at an assumed 37% federal rate is $3,441 less federal tax.

Case 2, MAGI in the phase-down. A couple with MAGI of $560,000 have a cap of $23,900. The same $9,300 payment lowers MAGI to $550,700, and the cap becomes $40,400 less 30% of $45,700 = $26,690. The cap rises by 30% of $9,300, or $2,790, which helps only if they have more than $23,900 of other state and local taxes to deduct.

Two cautions. The credit offsets California tax only up to the owner’s California liability, and a California-resident owner of a fund with income in several states may have credits in some states and not in others. And if the fund made the June 15 prepayment late or not at all in 2026, the California credit is cut by 12.5% of the owner’s share of the unpaid amount (our arithmetic: on a $9,300 share, up to $1,162.50 if nothing was prepaid). The right numbers come from the K-1 and the state supplement, not from this page.

Where it appears on your paperwork

• On the federal K-1: Notice 2020-75 says the payment lowers your share of non-separately stated income or loss; it is not a separate deduction for you. See K-1 boxes explained for how rental income and losses are reported and limited.
• On the state return: New York asks the claimant to attach Form IT-653 and to add the credit back as a state modification. New Jersey’s credit is refundable. California’s is a credit against personal income tax. Ask the sponsor for the state schedule that shows your share of the tax paid; it is separate from the federal K-1 in many funds.
• On estimated payments: when the entity pays the tax, your own state estimates may be lower. Federal and state rules on late K-1s are in estimated tax payments on K-1 income, and the delivery dates for 2026 K-1s are in when K-1s are due.
• On gains from selling property: the fund’s gain on selling a building is income to the entity and may be inside a PTE tax base. The separate federal exclusion for a sale of your own home is in our home-sale exclusion page and has nothing to do with PTET.

Dates to diarize

For a calendar-year fund:

• December 15, 2026: New York’s fourth PTET estimated payment, and Illinois’s fourth estimated payment (the 15th of the 12th month of the tax year).
• December 31, 2026: the year-end for the 2026 tax year; New York allows payments from December 16 to December 31 but not scheduled in advance.
• January 15, 2027: New Jersey’s fourth BAIT estimated payment.
• March 15, 2027: California’s final payment for a calendar-year entity; New Jersey’s election and Form PTE-100 for 2026; the date on which many 2027 elections must be made (New York: by March 15, 2027 for the 2027 year).

For the rest of the year-end tax checklist for fund holders, see the year-end tax calendar for non-traded REIT and BDC investors.

What a reader can do with this

These are questions this reading raises, not recommendations for any one return.

• Ask the sponsor, in writing, which states the fund elected PTE tax in for 2026, and when it paid. In New York and Massachusetts the pages we read give no way to add an election after the deadline.
• Ask whether you hold through a feeder. In New York a partner that is itself a partnership cannot pass the credit on.
• Find your 2026 MAGI range. Below $505,000 the full $40,400 may already cover your state taxes; above about $606,333 you are at the $10,000 floor and the entity-level payment is worth the most. Between those, each dollar of PTET also lifts the cap by 30 cents.
• If your state is Arizona or you are an individual in a fund that gives opt-out notices, read the notice. Arizona gives at least 60 days.
• Do not assume a rule runs past 2030. The federal cap returns to $10,000 for tax years beginning after 2029, and Massachusetts says its law expires if the federal limitation does.
• Keep the state supplement with the K-1, and give both to your preparer before estimated payments are set for the fourth quarter.

This is analysis of public documents, not investment, legal or tax advice. A CPA or tax attorney with your returns and the fund’s state schedules can say what the election did for you.

FAQ

Sources, read and saved on October 21, 2026: Public Law 119-21 (H.R. 1), July 4, 2025, section 70120 (congress.gov/119/plaws/publ21/PLAW-119publ21.pdf); H.R. 1 as passed by the House, engrossed, section 112018 (govinfo.gov, BILLS-119hr1eh); IRS Notice 2020-75 (irs.gov/pub/irs-drop/n-20-75.pdf); IRS Instructions for Schedule A (Form 1040), 2025; California Franchise Tax Board, Instructions for Form FTB 3893 (2026); New York Department of Taxation and Finance, PTET pages, calculation page and “States with a tax substantially similar to PTET” (updated March 19, 2024); New Jersey Division of Taxation, PTE/BAIT page (updated April 16, 2026); Illinois Department of Revenue, Publication 129, Q&A 689 and bulletin FY 2027-01; Mass.gov, Elective Pass-through Entity Excise (updated May 15, 2026, read from an Internet Archive copy because the site blocked direct requests); Connecticut DRS, Form CT-PET instructions 2025; Comptroller of Maryland, Form 510/511D (2026) and Tax Alert of April 13, 2026; Arizona Department of Revenue, Publication 713 (read from an Internet Archive copy); Georgia Department of Revenue, HB 149 FAQ; Colorado Department of Revenue SALT Parity Act pages (Internet Archive copy). The Minnesota and Pennsylvania agency pages could not be read and are not covered. State rates and rules change by year and many agencies publish new guidance each fall; verify against the agency before acting.