The long-term-rental wealth model

Without the loophole, can a rental
still beat the index?

Most short-term-rental content sells the seven-day carve-out. But you have a day job, you don't want to babysit guests, and your household income is over the passive-loss cliff. Here's whether a long-term rental still pencils out at your tax bracket — over a 5- or 10-year hold — against an S&P 500 buy-and-hold.

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01How it works

What a long-term rental actually does for you

You buy a rental property. Tenants sign a year-or-longer lease. Their rent covers your mortgage, taxes, insurance, and basic maintenance — with a bit left over.

The IRS lets you deduct depreciation. On a $300,000 property, that's about $8,000 a year of paper expense — money that lowers your taxable rental income on the books.

The catch. Rental losses are normally "passive" and can't lower your salary tax. A $25,000 special allowance for active landlords phases out between $100,000 and $150,000 of household income, gone entirely above that. Above the cliff, paper losses simply carry forward — they sit on a shelf until you sell the property, then release against the gain.

What still works. Even when the loss doesn't help your salary tax bill, the cash you receive is largely tax-free for the first decade. Your $250-a-month cash flow shows up as roughly zero on Schedule E — depreciation + interest + operating expenses cancel out the rent. Meanwhile your tenant pays down the loan and the property appreciates. Equity grows three ways at once.

For tax pros: §469(i) (the $25,000 allowance), §469 generally (passive-loss rules), 27.5-year SL on residential rentals, §469(g)(1) (release on fully taxable disposition). Plain-language entries in the glossary.

02Worked example

What it looks like at your bracket

A worked example for a real scenario the tool models in full. Your numbers will be different; this is just to show the shape of the math.

Illustrative scenario. Your numbers will vary. Property prices, rental markets, your actual financing, your specific filing status and MAGI all change the math. This is a worked example, not advice.

Property

Single-family rental · long-term

$300,000 · 25% down · 6.5% / 30-yr

Taxpayer

Married couple · Texas · $400K salary

Modest cash flow · 10-year hold · 8% prof. management

Year 1 — what shows up in your bank account

Net cash flow

+$236/mo

$2,832 per year

Federal tax on that cash

Depreciation + interest + opex offset rent on Schedule E

Result

Cash to you (no current federal tax)

+$2,832

The depreciation deduction shields the rent from income tax during the hold. You receive cash, but the books show roughly zero net income. (Recapture comes due at sale — see "the catch" below.)

10-year after-tax annualized return — rental vs. the index

Long-term rental

11.5%

S&P 500 buy-and-hold

7.8%

Both numbers are after taxes — federal capital-gains tax, state tax, the 3.8% net-investment-income surtax, and (for the rental) the recapture you owe at sale on all that depreciation you took along the way. Same starting equity ($75,000), same hold period, same tax bracket. The rental wins on a combination of tax-free cash flow during the hold, forced equity buildup as the tenant pays down the loan, and 3%/year appreciation on the property value.

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03Where it breaks

The catch

Long-term rentals are slower magic than the short-term-rental loophole. Four ways the math turns on you:

The passive-loss cliff is unforgiving

Above $150,000 of household income, ordinary rental losses can't lower your salary tax. They suspend (carry forward), and only release when you sell the property at a fully taxable disposition. If you plan to do a like-kind exchange someday, those suspended losses follow you to the new property — they don't release on the trade.

Vacancy + capex eat your cash flow

The $250-a-month "positive cash flow" assumes the tenant pays every month and nothing big breaks. A two-month vacancy plus a $5,000 HVAC replacement can wipe out a year's worth of profit. Industry rule of thumb: budget 1% of property value per year for capital expenditures, plus 5–8% of gross rent for vacancy.

Tenants are work, even with a manager

Property management runs 8–12% of gross rent and handles day-to-day. But you're still the one approving repairs, signing eviction filings, and dealing with the once-in-five-years tenant who stops paying. If you self-manage, the time burden is real even when nothing is going wrong.

The taxman gets paid back at sale

Every dollar of depreciation you took during the hold becomes a dollar of "depreciation recapture" when you sell — taxed at up to 25% federal plus state. The standard ways to delay or eliminate this: roll the proceeds into a replacement property (a "like-kind exchange," sometimes called a 1031), or hold the property until death so heirs inherit it at current market value with the recapture wiped out. The tool models all three exit paths.

Considering the short-term variant?

Short-term rentals can bypass the $150K cliff

If you're open to a short-term-rental property — beach condo, ski cabin, urban Airbnb — the IRS treats it as a small business rather than a passive rental. If you also materially participate (typically 100+ hours and more than your cleaner or co-host), losses become non-passive. Combined with cost segregation and 100% bonus depreciation, a single property can generate a six-figure year-one paper loss that does offset your salary income. Different work profile, different tax outcome, different audience.

See the short-term-rental loophole math →

04About this tool

Built by a 2-person team who wants objective, cold, hard math.

We don't sell properties. We don't sell courses. We don't take referral fees. The output is one printable page you can take to your accountant — not a buy / no-buy verdict. The model handles passive-loss rules, the short-term rental loophole, the real-estate-professional rule, cost segregation, bonus depreciation, vacation-home limits, the three main exit strategies (sell, like-kind exchange, hold to inheritance), and a side-by-side after-tax comparison against an S&P 500 index fund held over the same number of years.

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