I moved to Arizona on August 1, 2001, and spent the next four years working with various CPA firms across the Phoenix and Scottsdale area.
At one of those firms, I saw my first tax return with more than a million dollars of income. The Suttons (not their real name) owned commercial properties across the city. This was the first of many wealthy families I met who secured their fortunes through real estate.
I found real estate investing intriguing. Clearly, it could be lucrative. But aside from owning my home, I never pursued it. The late-night infomercials promising passive income looked glamorous, but from where I sat, real estate success seemed to take full-time effort, expertise, and a dash of luck.
In the fall of 2022, an opportunity emerged. I put my home of sixteen years on Airbnb.
I didn’t do it with visions of striking it rich. My reason was much simpler.
Here’s the story of my second year owning an Airbnb.
I turned my property into an AirBnB and lost money. I still consider it a win. Here's why... Share on X
Why My AirBnB Lost Money…And Still Felt Like A Win
I turned the house into a rental for one reason: flexibility. With one move, I could cover both a downside risk and an upside option.
As I explain in My First Year Owning an Airbnb Property, at the time, I was in a new relationship. If it didn’t work out, I needed a fallback plan. Having a home to move back to offered me downside protection.
Luckily, it’s the upside option we’re leveraging. My husband and I bought a new home, which we knew would require a major remodel. When that time came, we’d need a place to live.
I’ve watched clients shuffle between rentals, hotels, and storage sheds when construction dragged on. I knew that wouldn’t work for me—not while running a business. Stability at home preserves my energy for everything else.
If we kept the old house, whether it made money or not, the flexibility would be priceless.
So here was the plan: Rent the old house on Airbnb while living in the new house for a few years, using that time to build up cash reserves and devise a remodel plan. Once the remodel plan began, we’d turn off the Airbnb calendar and move back in. No leases, no scrambling for dog-friendly rentals, no stress if the project ran long.
That kind of peace of mind feels like biting into a cool peppermint patty.
Expertise
In order to make the plan work, I needed someone with expertise.
Of course, peace of mind only goes so far—you also need know-how.
My brother had been running Airbnb’s for more than a decade. Me? I’d rented a few on vacations.
So I asked him to help. For a percentage of the rental income, he flew out, set up the property, created the listing, handled pricing, guest communications, and most repairs.
Most importantly, he became a voice of calm reason.
He told me what it would take to become a “superhost” and assured me year two would be better than year one. He was right.
Looking back, he did for me exactly what I do for clients: guided me through unfamiliar decisions, set clear expectations, handled the details, and kept me from making too many costly mistakes.
Could I have squeezed out more cash flow doing it myself? I doubt it. Without the time or expertise, I wouldn’t have had the same occupancy, the same great reviews, and certainly not the same level of sanity.
All that being said, do I have passive income… or any income at all?
4 Ways of Measuring Earnings
Whether you call it income, earnings, or wealth-building, real estate has multiple dimensions. I break mine into four buckets: cash flow, effort, net worth impact, and taxes.
1. Cash Flow
In year one, total outgoing cash exceeded incoming cash by more than $18,000 thanks to two hefty repairs (a new pool pump and a major roof repair) and one mistake (installing a pool heater).
In year two, cash flow turned positive at $1,476. I’ve shared the numbers in the figure below.
Looking at year two numbers, leveraged real estate shows its appeal: someone else helps pay for the asset.
2. Effort
How much effort did those results require?
Even with my brother handling most of it, Airbnb takes work. Guests call about TVs. Neighbors text about sprinklers. I haul trash bins, pay invoices, and organize records at tax time. One guest asked us to come by to change a light bulb. Others want more hangers.
Passive? Not by my definition. With a robust portfolio and a full-time property manager, sure, then I’d call it passive.
3. Net Worth Impact
In years one and two, $9,815 and $7,845 of the cash flow paid down principal—this adds to wealth. (I accidentally made an extra payment in 2023, which is why more principal was paid in 2023 than in 2024. At a 2.75% mortgage rate, paying it down faster was not my goal. In transferring payments to occur from a business account, I neglected to stop the personal payment in time.)
As far as overall asset value, the property’s value dipped from the prior year. We’re not selling yet, so I don’t worry about short-term fluctuations. However, values could decline further before our timeline comes to fruition. There are no guarantees that the property will rise in value during our holding period.
4. Tax Impact
Here’s where it gets interesting.
Even though the 2024 cash flow was positive, in addition to cash expenses, you also deduct depreciation, which allows you to claim a dollar amount to recognize wear and tear on a tangible asset. This is all reported on tax form Schedule E and resulted in a net loss of $6,560 for the year.
Can I deduct that loss? It depends. Three key concepts are at play: real estate professional status, the MAGI-based special allowance for non-professionals, and the passive activity rules.
Note: If you want to study real estate taxation, the book Advanced Tax Strategies, Cracking the Code for Savvy Real Estate Investors (Amazon Affiliate Link) will help. My copy is tagged with color-coded mini sticky notes.
I’ll cover the nuts and bolts of the three factors to determine if the loss is tax-deductible.
1) Real Estate Professional Status
If you qualify as a real estate professional, rental losses are active and can offset wages and other active income.
It’s tough to qualify if you already have a full-time non-real estate career, but it can work for couples where one spouse devotes substantial time to the rentals, while the other maintains high W-2 or active business income. In our household, we both have full-time, non-real-estate careers, so this status doesn’t apply.
2) Special $25,000 Allowance (for Non-Professionals)
If you don’t qualify as a real estate professional, your ability to deduct rental losses against other income phases out as Modified Adjusted Gross Income (MAGI) rises:
- $100,000 or less MAGI: up to $25,000 deductible
- $100,001–$150,000: reduced by 50% of MAGI over $100,000
- Over $150,000: special allowance eliminated
Our income is too high, so this allowance doesn’t help us either.
3) Passive Activity Rules
Since neither of the first two provisions applies, we move on to the passive activity rules.
Here’s how they work:
- Passive Losses and Income Matching:
- The IRS categorizes income and losses as either passive or non-passive. Passive losses can only offset passive income (not earned income or portfolio income like interest or dividends).
- Royalty income is usually considered passive if the taxpayer does not materially participate in the activity (such as royalties from a book or mineral rights where the taxpayer isn’t actively involved in development or promotion).
- Passive Activity Grouping:
- Losses and income don’t have to come from the same property to offset one another, unless you’ve made a formal grouping election that says otherwise.
- Loss Carryforward:
- Unused passive losses carry forward indefinitely until you have passive income or dispose of the activity.
- Disposition Exception:
- If you sell your entire interest in a passive activity in a taxable sale to an unrelated party, it unlocks suspended losses, and they can offset income – regardless of how that income is characterized.
Short-term rental nuance: if your average booking is 7 days or less and you materially participate, that activity may be non-passive, which can allow losses to offset active income. Best to talk with your tax professional to determine if this applies.
How This Works for Us
Our rental is passive, but I have passive royalty income from my books and courses. In 2024, those royalties nearly equaled our rental loss, so the two offset each other. Prior-year passive losses are still being carried forward.
Technically, I could calculate the resulting tax savings and add that to my cash flow analysis. It would add a few thousand.
What Happens Upon Sale?
That disposition exception can be a powerful tool for high earners when pairing the transaction with a high-income year. Passive losses that have been carried forward unlock at sale and offset income taxed at your marginal rate.
For retirees with carry-forward passive losses and large IRAs, unlocking losses in the RMD years (beginning at age 73–75, depending on birth year) could be more valuable than doing so earlier, as your tax rate may be higher. Or you might time a sale with a Roth conversion.
Caveat: not all “unlocked” losses offset at the top rate. Depreciation taken along the way is subject to recapture (generally, up to a 25% tax rate applies), and there are additional nuances. So, it is not quite as simple as saying all losses offset income at the highest rate. But then it never is simple when it comes to taxes, is it?
Our Plan
We expect to move back into the Airbnb in 2026 during our rebuild, then sell it in 2027. That sale should unlock accumulated passive losses while our marginal rate is high.
That leaves us one last item to navigate: the home-sale gain exclusion rules.
Primary Residence Gain Exclusion Rules
When you sell a primary residence, you can exclude capital gains from taxation up to $250,000 as a single filer, and $500,000 as a married-joint filer, if certain tests are met. At time of sale, you must have owned and lived in the home for two out of the previous five years, and you can’t have used the exclusion in the prior two years. Only one spouse needs to meet the ownership test, but both must meet the use test.
- I meet the ownership test.
- We both lived in the house in 2022, although we weren’t yet married, and we will live there again as a married couple in 2026.
However, the years we had it as a rental are a “non-qualified use” and there will be a pro-rata calculation to account for those. For example, if we rented itl three out of the ten years prior to sale, 3/10 of the normal gain exclusion would be taxable. In this example, instead of a $500,000 gain exclusion (which would apply as we are married and filing jointly at the time of sale), because of the rental years, we may get $350,000 of gain exclusion. We’ll be running all this through our CPA, of course.
After accounting for capital gain exclusion, you then recapture depreciation, followed by suspended passive losses offsetting other forms of income.
Rental Real Estate for Retirement
Would I rely on this property, or something similar, for steady retirement income?
No.
The cash flow is unpredictable. I don’t want a varying paycheck in retirement, let alone one that may at times require me to put money back in.
As a wealth-builder, real estate can be great. As a retirement paycheck for the average, non-professional investor? I find the cash flow too lumpy for comfort.
My Goals
We all invest for different reasons. It gets confusing when goals are fuzzy. It works best if each investment has a clear job description.
For my Airbnb, the job description was crystal clear: provide flexibility and peace of mind. It’s doing that job beautifully. The freedom to move back on our timeline and start our project without scrambling is priceless.
Flexibility is a valuable feature.
Not every decision is about maximizing returns. Maximizing life satisfaction and ease of transitions matters too. By that measure, this rental has been a win.
What about you?
Have you owned rental real estate? What were your goals, and how did it work out? We’d love to hear your experiences in the comments below.
My experience with owning rental real estate is very limited. We kept our little starter home as a rental for a year after buying our “move-up house” where we raised our kids. At the time, we couldn’t have sold the first home without losing money, so we waited. After a year, the market improved for sellers, so we sold, walked away with $10K, and were glad not to have a responsibility that we didn’t feel we had time for, with two careers and two young children.
Selling it was the single worst financial decision we’ve ever made. The market in our Northern California town exploded within a year or two, and that same home is now worth 3-4 times what we sold it for in 1999. It could have been paid off years ago and just bringing in rental income. We live in a college town that always has very low rental availability. Landlords get high rents and one-year leases. It would not have been hard to keep the home occupied.
All these years later (I just retired, kids are grown and gone), and we’re considering two possibilities that could make us landlords again. First, we may buy a modest property where our daughter lives for her and a roommate(s) to live in (and pay us rent). The purpose would be to stabilize her living situation and have that rent money going into an asset that she will eventually inherit. Second, we may move to another property for ourselves (either in our hometown or in the area where our daughter lives) and keep our current home as a rental. We’d do this for two reasons: (1) We live in a condo community (our condo is six years old, and we’re the original owners), and the resale values have been lagging, mainly because of high HOA fees scaring off buyers. It’s possible that if we sold right now, we might have to bring cash to the closing once we pay a realtor. However, we still could get very good rent for it, and with our 2020 low mortgage rate would more than break even. (2) If we relocate 450 miles south to where our daughter lives, we might want a fallback in case we don’t like living down there and miss our longtime hometown.
I’d say our circumstances are a bit different from yours. Because it’s a great rental market for landlords where we live, we could have stable and high rental income, unlike the ups and downs of an AirBnB. However, we wouldn’t be doing it for the income per se but rather providing ourselves flexibility and not losing money on the condo sale.
Thank you for sharing the details! So much of our perspective depends on timing. We had a CPA firm client who went all in on Northern California real estate in 2004, and lost everything a few years later when the Great Financial Crisis hit. I wonder if your perspective would be different if you had sold in 2004 or 2005 right before everything declined? It would certainly would have recovered, but would have been quite stressful at the time. While it may appear as one of the worst financial decisions, it sounds like based on lifestyle stage, it felt right to sell at the time. You are so right – each person’s circumstances are different. It is so helpful to hear from one another and see different thought processes. Much appreciated!
Excellent article Dana. Your situation is more complex than most but the way you broke it down made it easy to follow. I love your bravery to declare that not every investment has to make money. Clearly some do, but others provide options, comfort or other guality of life gains that are also important. Thank you !
Thank you. So often we only hear the big success stories – or the horror stories. Mine is neither. Just a bit of reality that falls in the middle!
I always find your posts clearly written and a great learning experience. Thank you!
Thanks for your kind words regarding Dana’s writing. I agree she’s been a great addition to the team, and am pleased to have the positive feedback from the readers of this blog!
Thanks for this article Dana! Our personality really matters. At times over the past 40 years starting a business and home rental were considered. I focused on the employee path and personal finances. Liability, complexity, and stress were lower. Peace, job satisfaction, and brain-bandwidth to serve as a nonprofit officer took their place. I was ready to retire years before a layoff. Retirement is excellent. It is good to consider a wide range of options and experiences and then chart your course. My happy path was quiet and calculated, and I have great respect for bold entrepreneurs. Thanks for providing this view into renting your home.
We did rentals for awhile. It was a money maker, but there’s no free lunch. It takes work. In the end, we sold the properties. Focusing on what I do best really paid off and today in retirement we have no regrets. Thanks for the nice article
I had a similar experience, Jack. As I’ve written about, we rented our mountain cabin for 7 years prior to retirement. Once we retired, we ended up buying a different cabin in the mountains as our “forever home” and had a decision to make: Do we keep the original cabin and rent it (knowing it had made money for us), or should we sell it and simplify our lives in retirement?
We ended up selling it (like the reader above, we sold it right before the market took off), and haven’t had a single regret (though I do admit our timing would have been better if we had rented it for a few years and experienced the 2-3x increase in home prices that happened here in the mountains after COVID hit, and everyone and their brother wanted a cabin to escape the city and “work from home” in the mountains).
Great insight Dana. This makes me feel better about decisions I have made.
I grew up in a “landlord family”. My father was not a formally educated person, but he knew how to unlock the puzzle that was residential real estate. By the time I was born he worked as an electrician at a local university and had maybe 3 other rental houses in addition to our primary residence. By the time he passed away those 3 had grown to 40 single family houses. He had a friend who was a realtor. The friend would keep an eye out for undervalued/unloved/unwanted houses often in weird locations (is this even a street?). After they sat on the market a while the friend would give my dad a call and we often ended up with another property. My dad would borrow against the equity in one home to purchase another (wash rinse repeat).
We repaired, rebuilt, cleaned advertised, showed, managed, evicted etc. everything ourselves. I even had my own roofing crew for reroofing our houses as a summer job in high school. I’m sure we weren’t the best, but charged a fair price (read as- ridiculously low compared to professionals) and got a great tan.
Our house was so full of furnace motors, extra cabinets, ladders, siding breaks that I wouldn’t invite friends over. For us real estate was definitely not a passive investment situation.
My dad (and eventually I) could fix anything I gained enough on the job experience to build my own house as an adult, but that function, it turns out, is the easy part. The paperwork is what really matters. My parents really didn’t have a handle on the business side of the operation.
For a short time (in addition to my day job) I tried my hand at a rental property on a local college campus. After the daily calls from parents about their childrens’ inability to function on their own and weekly trips (at least) to let someone in who had locked themselves out of the house, I concluded that I would take my learned skills and leave the landlording to someone better suited. I’ve never regretted that decision.
Today our investments consist primarily of low cost well diversified index funds and my wife and my real estate holdings are our primary residence and a vacation home which we purposely purchased in a community that does not allow short term rentals.
Thank you so much for this timely article. My husband and I are in a ‘not so different’ situation. Our current primary residence is almost paid off and we are planning to close on a new house at the end of the month to move in to. We are actively considering selling vs renting out the current home. initially the plan was to sell it and pay off the new mortgage as soon as possible. But it’s the house kids grew up in and they’re sentimental about it. They made us promise that we will have Christmas there this year even though we would have moved out by months’s end. We love the house too. Plus if all things go south we could move back to a house where the property tax is a fraction of the new one: if we decide to rent it will be for long term.
But you do raise a good point – capital gain tax situation as primary residence.
Wish I could call you and run all the scenarios by you. ❤️
Thank you, Dana, for an interesting, well-written post. My husband and I bought several single-family homes (all with mortgages) in the southeast 20 years ago when we couldn’t afford to move up from our starter home in a very HCOL area. That began my 18-year experience as a landlord. I wasn’t experienced with financials. Didn’t know about cap rates, etc. However, as the years passed, I would do my own rough calculations and thought I was getting about 3-4% after expenses. This didn’t seem like enough given all the work and worry of being a landlord. Even with property managers, I was more involved in people’s lives than I wanted to be. I had just fully recarpeted and repainted a rental when the tenant wanted to keep a bunny rabbit. I said no. The tenant kept writing letters imploring me to change my mind. There’s no pet fee I could charge that would be high enough to cover the possible damage from a bunny. Another time, a tenant was living with his girlfriend and they broke up. He asked the property manager if he could stay and pay less rent, since he had lost the girlfriend’s income. I did a lot of back-of-the-envelope calculations and realized I was already charging a very reasonable (not high) rent. I had to say no, that I couldn’t afford to get less rent. Another time, a tenant abandoned the single-family house without informing the property manager and without paying remaining rent. This was in winter, and a water pipe cracked. We fixed everything, but it was a lot of work. There’s more I could tell, but I will stop here. I finally sold them, one by one over several years; and I don’t miss getting calls from the property managers. Like others here, I sold two rental houses a year or so before the big run-up in prices and missed out on that. But I’m thankful to no longer be dealing with them. I tried hard to be a good landlord because I had been a tenant many times; but the experience wore me down.
Dana, Great article!!!
Question: why did you say that the pool heater was a terrible decision, and what type was it? I live in Florida and am considering options.
Great question! First, it couldn’t keep up when temps dropped into the 30s. So tenants thought they would have an 80 degree pool and it was closer to 60. It increases the electric bill quite a bit when it is on, so trying to figure out how to charge for that was challenging. Then, we’d agree on a rate, but it wouldn’t work so well, so we’d credit back that part. But the electric bill was still high because the heater was running – but it just couldn’t keep up. To work well in the colder months, you have to keep the pool cover on when not in use. It isn’t easy to take the cover on and off, so we bought a roller that sits at the end to help roll the cover up. Tenants would leave, but not put the cover back on. So the pool wasn’t warm for the next tenant. Then, in the summer, the cover disintegrates here in AZ because of the heat and sun. We don’t have a good place to store it. We realized it would require replacing the cover annually. So overall we decided it was a lot of money spent on something that didn’t work well. It sounded like a great idea that would make the property more appealing… but it didn’t work out that way.
Dana,
Thank you for the information you shared.
I’ve been investing in real estate since 2005, when I rented out my first house. It was tough—there was little to no profit, but I didn’t want to give up. Then came the Great Financial Crisis. I held onto that house despite the lack of positive cash flow and continued working in my relatively high-paying W-2 job. Being naturally frugal, I maxed out my 401(k), dabbled a bit in stocks, and continued investing in real estate.
Over the years, as my W-2 income gradually increased, my spending only went up marginally. I kept acquiring properties over the next decade. By 2023, I owned four properties totaling 10 units, including my primary residence. I converted one unit in a duplex to a short-term rental, which has been good—though not great. On average, my portfolio brings in around $2,000–$3,000 per month in positive cash flow. I’ve consistently reinvested that income back into my properties. Some months it’s been as low as $500, and others well over $3,000—so yes, it fluctuates quite a bit.
Like you, I wouldn’t want to rely on that income alone in retirement. Fortunately, I retired from the military with a pension and disability benefits that more than cover my cost of living. At this point, I continue working my W-2 job while setting aside more funds for future real estate and maxing out my 401(k) and self-directed IRA.
I remain cautiously optimistic. As Mike Tyson once said, “Everyone has a plan until they get punched in the face.” I don’t know when that punch is coming—but I know it’s coming.
Long story short: I could have invested more aggressively in real estate, but my stress tolerance just wasn’t there. It’s been a solid net worth builder, but not a game-changer. It’s often been frustrating. Still, having a high-paying W-2 job and living well below my means has made it much easier to deal with the ups and downs.
Thank you for the information. I will check out the book for help.