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…
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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.

The post Why My Airbnb Lost Money…and Still Felt Like a Win appeared first on The Retirement Manifesto.