House hacking has become a popular real estate strategy, particularly as home prices and interest rates have risen. By renting out part of a primary residence—whether a spare bedroom, a basement unit, or a duplex—homeowners can offset their mortgage costs and build equity at the same time. However, this hybrid approach to homeownership brings unique tax implications that differ from both traditional homeownership and real estate investing.
Below, I explore the financial and tax considerations of house hacking, including deductions, tax treatment upon sale, and how it compares to flipping properties.
1. What is House Hacking?
House hacking is the practice of living in a property while renting out part of it to generate rental income. The rental revenue can help cover mortgage payments, property taxes, and other expenses, effectively reducing the cost of homeownership.
Why House Hacking is Popular
- Rising Interest Rates: With mortgage rates higher than they were just a few years ago, house hacking has become a way for buyers to afford homes despite increased borrowing costs.
- Increased Housing Costs: Home prices remain high in many areas, making house hacking an appealing way to reduce monthly expenses.
- Tax Benefits: House hackers can take advantage of deductions typically reserved for rental properties, making it an attractive tax strategy.
Has the Trend Slowed?
While rising rates have slowed traditional home purchases, house hacking remains attractive because it allows buyers to afford more expensive homes than they otherwise could. Some buyers who might have waited for lower interest rates are opting for house hacking as a way to make homeownership financially viable now.
2. Tax Deductions for House Hackers
House hackers enjoy a unique combination of tax breaks, blending personal residence deductions with rental property deductions. However, tax treatment depends on how much of the property is rented out and whether the property is owner-occupied for more than half the year.
Personal Residence Deductions (for the portion you live in):
- Mortgage Interest Deduction: If you itemize deductions, you can deduct mortgage interest on up to $750,000 of mortgage debt ($375,000 for married filing separately).
- Property Taxes: You can deduct up to $10,000 in state and local taxes (SALT), which includes property taxes. However, rental portions of the property are not subject to this cap (more below).
Rental Property Deductions (for the portion you rent out):
- Depreciation: You can depreciate the rental portion of your home over 27.5 years. For example, if you own a duplex and rent out half, you can depreciate 50% of the home’s value (excluding land).
- Repairs and Maintenance: Expenses like fixing a leaky roof, repainting rental units, or replacing appliances in tenant-occupied areas are fully deductible.
- Utilities and Expenses: If you cover utilities for tenants, you can deduct the portion allocated to the rental unit.
- Home Office Deduction: If you use part of the home exclusively for business purposes, you may be eligible for a home office deduction.
Example: If you own a four-unit building, live in one unit, and rent out the other three, 75% of your mortgage interest, property taxes, and repair costs can be deducted as rental expenses. The remaining 25% is subject to the personal residence rules.
3. Selling a House Hack: Capital Gains and the Section 121 Exclusion
Selling a house-hacked property introduces additional tax considerations. The biggest factor is whether the property qualifies for the Section 121 capital gains exclusion, which allows homeowners to exclude up to $250,000 ($500,000 for married couples) of gain on the sale of a primary residence, as long as they have lived there for at least two of the past five years.
How Section 121 Applies to House Hackers
The exclusion only applies to the portion of the property used as a primary residence. The rental portion is treated as an investment property and subject to capital gains tax. Any depreciation claimed on the rental portion must be recaptured upon sale, taxed at a 25% rate.
Example: You buy a duplex for $400,000, live in one unit, and rent out the other. Five years later, you sell the property for $600,000. Your $200,000 gain is split: $100,000 (your personal residence portion) qualifies for the Section 121 exclusion, meaning it is tax-free; and $100,000 (rental portion) is subject to capital gains tax (typically 15-20%) and depreciation recapture at 25%.
Planning ahead can minimize these taxes. Converting the entire property into a primary residence for a few years before selling can maximize the tax-free gain.
4. House Hacking vs. Flipping: Pros and Cons
Both house hacking and flipping involve real estate investment, but they differ in key ways.
House Hacking:
- Generates rental income while you live in the property.
- Allows you to build equity over time with long-term appreciation.
- Offers tax advantages, including depreciation and rental deductions.
- Eligible for the Section 121 exclusion on the personal residence portion.
- Requires tenant management and potential landlord responsibilities.
- Subject to rental property tax rules, including depreciation recapture.
- Long-term commitment (typically years vs. months for flipping).
Flipping Houses:
- Can generate high short-term profits.
- No long-term tenant management. (This is something most would-be house hackers seriously underestimate with respect to the time and headache of dealing with potentially difficult tenants).
- Faster capital turnover for reinvestment.
- No capital gains exclusion: flipping profits are taxed as ordinary income if the home is held for less than a year.
- High risk and upfront costs: renovation expenses and market fluctuations can eat into profits.
- No depreciation tax benefit, since the property is not held for rental income.
Example: If you buy a home for $200,000, renovate it, and sell it six months later for $300,000, the $100,000 profit is taxed as ordinary income, potentially at a higher rate than long-term capital gains. By contrast, a house hacker holding the same property for two years and renting out part of it could benefit from lower capital gains taxes and rental income deductions.
5. Conclusion
House hacking remains a strong strategy for homeowners looking to reduce housing costs, build wealth, and take advantage of rental property tax benefits. While it differs from house flipping in terms of timeline and tax treatment, it offers a balanced approach for those looking to generate passive income without taking on full-time property development risks. Before making a decision, potential house hackers should consult with a tax professional to ensure they are maximizing available deductions and structuring their investment in the most tax-efficient way.
6. Next Steps
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Attorney and CPA
/Meet Chad D. Cummings

I am an attorney and Certified Public Accountant serving clients throughout Florida and Texas.
Previously, I served in operations and finance with the world’s largest accounting firm (PricewaterhouseCoopers), airline (American Airlines), and bank (JPMorgan Chase & Co.). I have also created and advised a variety of start-up ventures.
I am a member of The Florida Bar and the State Bar of Texas, and I hold active CPA licensure in both of those jurisdictions.
I also hold undergraduate (B.B.A.) and graduate (M.S.) degrees in accounting and taxation, respectively, from one of the premier universities in Texas. I earned my Juris Doctor (J.D.) and Master of Laws (LL.M.) degrees from Florida law schools. I also hold a variety of other accounting, tax, and finance credentials which I apply in my law practice for the benefit of my clients.
My practice emphasizes, but is not limited to, the law as it intersects businesses and their owners. Clients appreciate the confluence of my business acumen from my career before law, my technical accounting and financial knowledge, and the legal insights and expertise I wield as an attorney. I live and work in Naples, Florida and represent clients throughout the great states of Florida and Texas.
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