Whether it is worth renting out your house comes down to three honest tests: the rent has to cover every real cost (not just the mortgage), the tax benefits have to matter for your situation, and you have to be willing to take on a landlord’s legal duties. A property that pencils out on the back of an envelope often breaks even or loses money once vacancy, maintenance, insurance, and the eventual tax bill at sale are counted. Run the numbers below before you list.
Does the Cash Flow Actually Work?
Start with the rent a comparable home in your area realistically pulls in over a full year. Then subtract, in order:
- Mortgage principal and interest
- Property taxes and landlord insurance, which together typically run 1% to 3% of the home’s value each year (on a $300,000 home, that’s $3,000 to $9,000 before anything else)
- A vacancy reserve of 5% to 10% of gross rent, because no property stays rented every day; on $2,000-a-month rent, that’s $1,200 to $2,400 a year set aside for empty months
- Maintenance and repairs, commonly reserved at about 1% of the property’s value per year, more for older homes
- Any utilities you cover, plus legal fees for the lease and accounting fees at tax time
If total expenses exceed gross rent, the property runs at a loss. A positive balance means the house is adding to your wealth, though even a modest paper loss can still work in your favor once deductions come into play.
If you hire a property manager instead of doing the work yourself, plan on 8% to 12% of monthly rent. On a $2,000 rental, that’s $160 to $240 gone every month before you see anything. Whether it’s worth it depends on how many properties you have and how much you value your evenings.
What the Tax Picture Really Looks Like
Rental income goes on Schedule E, and the IRS treats it as passive income with its own rules.1Internal Revenue Service. Topic No. 415, Renting Residential and Vacation Property Deductions offset a lot of what you collect, and depreciation is the biggest reason a modest-cash-flow rental can still be a strong tax-advantaged asset.
Depreciation
The IRS lets you deduct the cost of the building itself (not the land) over 27.5 years.2Office of the Law Revision Counsel. 26 USC 168 – Accelerated Cost Recovery System On a $275,000 building basis, that’s about $10,000 a year in paper losses you subtract from rental income without spending a cent. Depreciation alone can turn a property that barely breaks even into a genuine tax win.
Other Deductions
You can also deduct mortgage interest, property taxes, insurance, repairs, advertising, travel to the property, and professional fees. Watch the line between repairs and improvements: fixing a leaky faucet is a repair deducted the same year, while a new roof or kitchen remodel is a capital improvement that has to be depreciated over years.3Internal Revenue Service. Publication 527 (2025), Residential Rental Property Misclassifying the two is a fast route to an audit adjustment.
The $25,000 Passive Loss Allowance
Here’s the provision that makes rental property genuinely powerful for many owners. If you actively participate in managing the property (approving tenants, setting rent, authorizing repairs), you can deduct up to $25,000 in rental losses against ordinary income like wages.4Office of the Law Revision Counsel. 26 USC 469 – Passive Activity Losses and Credits Limited The allowance begins phasing out once your adjusted gross income passes $100,000 and disappears entirely at $150,000. Under the threshold, depreciation and other write-offs can shelter part of your paycheck, not just the rent.
The Tax Bill When You Sell
Depreciation saves you money every year you own the property, and the IRS collects on those savings at sale. When you sell for more than the depreciated value, the depreciation you claimed (or could have claimed) is taxed at up to 25%. Deducted $50,000 over the years? Up to $12,500 comes due at closing, separate from any capital gains tax on appreciation. Skipping depreciation to avoid this doesn’t help: the IRS recaptures what you were entitled to take whether you took it or not.
Higher-income landlords also pay an extra 3.8% net investment income tax on rent once modified adjusted gross income passes $200,000 single or $250,000 married filing jointly.5Office of the Law Revision Counsel. 26 USC 1411 – Imposition of Tax The tax hits the smaller of your net investment income or the amount you’re over the threshold.
Records back up every deduction. If the IRS disallows what you can’t document, the accuracy-related penalty is 20% of the underpayment,6Office of the Law Revision Counsel. 26 USC 6662 – Imposition of Accuracy-Related Penalty and the fraud penalty is 75%.7Office of the Law Revision Counsel. 26 USC 6663 – Imposition of Fraud Penalty
If It’s Your Former Home, Watch the Two-Out-of-Five Clock
This is the piece most owners converting a primary residence into a rental miss, and it can cost tens of thousands of dollars.
When you sell a home you’ve lived in, Section 121 lets you exclude up to $250,000 of capital gains (or $500,000 married filing jointly), but only if you owned and used the home as your principal residence for at least two of the five years before the sale.8Office of the Law Revision Counsel. 26 USC 121 – Exclusion of Gain From Sale of Principal Residence The moment you move out and start renting, the clock on that five-year window starts running. Rent for more than three years without moving back, and the exclusion is gone.
Even if you sell inside the window, gains tied to depreciation you claimed after May 6, 1997 can’t be excluded and must be recaptured.9Internal Revenue Service. Publication 523, Selling Your Home The practical takeaway: renting for a couple of years before selling can combine strong deductions with a partial exclusion and work beautifully. Renting indefinitely means planning for the full tax bill at sale.
The Legal Duties You Take On
Being a landlord isn’t only a financial decision. Several legal duties attach the day a tenant moves in, and a few of them carry real penalties.
Switch to Landlord Insurance
A standard homeowners policy usually won’t cover a home you’re renting to someone else. Insurers require a landlord or dwelling fire policy for tenant-occupied properties, covering liability if a tenant or guest is injured, damage to the structure, and lost rental income if the home becomes uninhabitable after a covered loss. Premiums typically run 15% to 25% higher than a homeowners policy because tenants file more claims than owner-occupants. The policy won’t cover a tenant’s belongings; requiring renter’s insurance in the lease handles that. Keep the homeowners policy in place while renting and your insurer can deny claims outright.
Fair Housing
The federal Fair Housing Act bars discrimination based on race, color, national origin, religion, sex, familial status, or disability at every stage of the rental process, from advertising through maintenance.10Office of the Law Revision Counsel. 42 USC 3604 – Discrimination in the Sale or Rental of Housing Many states and cities add classes like sexual orientation, gender identity, source of income, or military status. Advertising language is where landlords stumble most often; phrases like “no children” or “singles preferred” trigger complaints.11U.S. Department of Housing and Urban Development (HUD). Housing Discrimination Under the Fair Housing Act Assistance animals are another common trap: you can’t charge pet fees or deposits for service animals or emotional support animals, and a no-pets policy doesn’t override the duty to make a reasonable accommodation.12U.S. Department of Housing and Urban Development (HUD). Fact Sheet on HUD’s Assistance Animals Notice
Lead Paint (Pre-1978 Homes)
If your home was built before 1978, federal law requires you to give every tenant a lead paint disclosure and the EPA’s lead hazard pamphlet before they sign the lease.13Office of the Law Revision Counsel. 42 USC 4852d – Disclosure of Information Concerning Lead Upon Transfer of Residential Property Civil penalties reach up to $22,263 per violation under current inflation-adjusted figures.14Federal Register. Civil Monetary Penalty Inflation Adjustment Renovation work on pre-1978 properties also triggers the EPA’s Renovation, Repair, and Painting Rule, which requires certified renovators and certified firms.15US EPA. If I Rent Out Apartments Built Before 1978, in Order to Comply With the Lead Renovation, Repair and Painting (RRP) Rule
Local Licensing and Habitability
Many cities and counties require a rental license, inspection, or certificate of occupancy before you can legally collect rent. Some jurisdictions inspect every rental unit annually; others just want a one-time registration. Operating without the required permits can bring fines into the thousands, and in some places tenants can withhold rent until the property is properly registered.
Nearly every state also recognizes an implied warranty of habitability: working plumbing, electricity, heat, weatherproofing, and structurally sound conditions. When essential systems fail, tenants in many states can withhold rent, make repairs and deduct the cost, or terminate the lease if you delay. Habitability disputes that reach court almost always favor the tenant when the landlord dragged their feet.
Security Deposits and the Lease
Most states cap security deposits at one to two months’ rent, though a handful impose no cap. Returning the deposit is where landlords most often get sued. Deadlines for returning the deposit or providing an itemized list of deductions generally run 14 to 60 days after move-out, with 21 to 30 days most common. Miss the deadline, and many states strip your right to keep any part of the deposit and impose penalties of two to three times the deposit on top.
A written lease covering rent, due date, late fees, maintenance responsibilities, pet policy, and grounds for termination is the foundation for any eviction. If a tenant stops paying, most states require a written notice (typically three to five days for nonpayment) before you can file. You cannot change the locks, shut off utilities, or remove belongings. Self-help evictions are illegal virtually everywhere and carry serious liability.
Self-Manage or Hire Out
The decision comes down to how many properties you own and what your time is worth. A property management company handles screening, rent collection, maintenance coordination, and eviction filings for 8% to 12% of monthly rent. For a single rental close to where you live, self-management often makes sense. For multiple properties, out-of-town properties, or owners who don’t want a 2 a.m. plumbing call, a manager earns the fee.
Screening is the single decision that most determines whether the whole experience is profitable or miserable. Credit checks, income and employment verification, prior-landlord references, and background checks (within the bounds of your state’s screening laws) prevent the majority of the problems landlords face. A reliable tenant is worth more than an extra $50 in rent from someone with a spotty payment history.
So: is it worth renting out your house? If the numbers clear vacancy and maintenance with room to spare, if depreciation and deductions land where they help you, if you can meet the two-out-of-five clock (should you plan to sell), and if the landlord duties fit your life, yes. If any of those legs is weak, selling or waiting is often the better answer.