A little-known provision in Minnesota's latest tax bill offers property owners a way to reduce federal taxable income—but only if they understand how it works.
Most real estate and property management owners in Minnesota don't realize they may have access to a federal tax deduction that bypasses the $10,000 SALT cap—one of the biggest tax hits small business owners have faced since 2017. A provision buried in HF2438, Minnesota's taxation bill, extends this opportunity through 2027.
The pass-through entity tax election, codified in Article 2, Section 9 of HF2438 (Minnesota Statutes 289A.08, subd. 7a), allows S-corporations, partnerships, and LLCs taxed as partnerships to make an annual election to pay state income tax at the entity level rather than passing income through to owners' individual returns.
Here's the key benefit: when the entity pays Minnesota state tax at the highest individual rate (9.85%), qualifying owners can deduct that state tax payment on their federal return—and crucially, this deduction is not subject to the $10,000 SALT cap that limits other state and local tax deductions.
For a real estate owner or property management company with significant state tax liability, this can translate to substantial federal tax savings annually. The deduction reduces federal taxable income dollar-for-dollar, lowering the owner's federal tax bill at their marginal rate.
This election is available to pass-through entities—primarily S-corps, partnerships, and partnership-taxed LLCs. Sole proprietorships and C-corporations do not qualify. Real estate investors, property management companies, and real estate development firms structured as these entity types should evaluate whether this election makes sense for their situation.
The election is voluntary and made annually, so owners can decide year-to-year whether to participate based on their tax circumstances.
The provision is effective retroactively from January 1, 2026, and extends through taxable years beginning after December 31, 2027. Elections are available for taxable years beginning after December 31, 2020.
This means property owners may be able to claim benefits on 2026 and 2027 returns, and potentially amend prior returns if they were eligible in earlier years and did not previously make the election.
If you own or manage real estate through an S-corp, partnership, or partnership-taxed LLC, discuss this provision with your tax advisor or CPA. They can model whether the election would reduce your total federal and state tax burden given your specific income level and deduction situation.
The math varies by owner—factors like federal tax bracket, state tax liability, and other deductions all matter. But for owners with substantial Minnesota state tax obligations, this election can be a meaningful planning tool.
The window to benefit from this election closes after 2027, so this is worth reviewing sooner rather than later with your tax professional.
This explainer is based on HF2438, Article 2, Section 9 (289A.08, subd. 7a), page 33. For entity-specific guidance, consult a Minnesota tax professional.