What is House Hacking?

House hacking is the process of buying a property and living in it while renting out extra space to tenants in order to offset your mortgage and other housing costs. It’s a great way to get started in real estate investing while also building equity and creating cash flow.

There are a few different ways to go about house hacking. You can buy a duplex, triplex, or fourplex and live in one unit while renting out the others. Or, you can buy a single-family home and rent out rooms to roommates. Or, you can buy a property with an in-law unit or accessory dwelling unit (ADU) and live in one unit while renting out the other.

The key to successful house hacking is to make sure that your rental income covers your mortgage and other housing expenses. That way, you’re essentially living for free while also building equity and creating cash flow.

What are the Benefits of House Hacking?

There are a number of benefits to house hacking, including:

1. You can live for free or close to free.

If your rental income covers your mortgage and other housing expenses, you can essentially live for free. That’s a huge benefit, especially if you’re just starting out in your career and don’t have a lot of extra income.

2. You can build equity quickly.

Because you’re living in the property, you’re able to pay down your mortgage quickly. That means you’ll build equity in the property faster than if you were just renting it out.

3. You can create cash flow.

If your rental income exceeds your mortgage and other housing expenses, you’ll have positive cash flow. That extra cash can be used to pay down debt, save for retirement, or invest in other properties.

4. You can get started in real estate investing with little money down.

If you buy a duplex, triplex, or fourplex, you can often do so with little money down. That’s because you can get a loan for the purchase price of the property and then use the rental income from the other units to help you make the mortgage payments.

5. You can take advantage of tax benefits.

Owning rental property comes with a number of tax benefits, including the ability to deduct mortgage interest, property taxes, and repair and maintenance costs. That can help you save a lot of money at tax time.

6. You can learn about being a landlord.

If you’ve ever thought about becoming a landlord, house hacking is a great way to learn about the business. You’ll get first-hand experience dealing with tenants, maintaining the property, and more.

7. You can add value to the property.

If you do any renovations or add any amenities to the property, you’ll be able to increase the rent you charge and add value to the property. That will help you maximize your return on investment when you eventually sell the property.

8. You can sell the property for a profit.

If you house hack a property and live in it for a few years, you’ll be able to sell it for a profit. That’s because you’ll have built up equity in the property and the value of the property will have increased.

9. You can 1031 exchange into another property.

If you house hack a property and then want to move into another rental property, you can do a 1031 exchange. That allows you to sell the property without paying any capital gains taxes on the sale.

10. You can live in a nicer property than you could otherwise afford.

If you buy a duplex, triplex, or fourplex, you can live in one of the units and rent out the others. That way, you can live in a nicer property than you could otherwise afford. And, you’ll be able to offset your housing costs with the rental income from the other units.

11. You can use the property as a primary residence or an investment property.

If you buy a duplex, triplex, or fourplex, you can use it as either a primary residence or an investment property. If you live in one of the units, you can use it as your primary residence. And, if you rent out all of the units, you can use it as an investment property. That flexibility can be helpful if your circumstances change in the future.

12. You can avoid paying private mortgage insurance (PMI).

If you put less than 20% down on a property, you’ll typically have to pay private mortgage insurance (PMI). But, if you live in one of the units in a duplex, triplex, or fourplex, you can avoid paying PMI. That’s because the rental income from the other units will help you make the mortgage payments.

13. You can buy a property in a better location than you could otherwise afford.

If you buy a duplex, triplex, or fourplex, you can often afford to buy a property in a better location than you could otherwise afford. That’s because the rental income from the other units will help offset the cost of the mortgage. And, a better location will typically lead to higher rents and more demand from tenants.

14. You can get started in real estate investing with little experience.

If you buy a duplex, triplex, or fourplex, you can get started in real estate investing with little experience. That’s because you’ll be able to offset your housing costs with the rental income from the other units. And, if you live in one of the units, you’ll be able to get first-hand experience dealing with tenants and maintaining the property.

15. You can use leverage to buy more properties.

If you buy a duplex, triplex, or fourplex with a loan, you’ll be able to use leverage to buy more properties. That’s because you’ll only have to put down a small percentage of the purchase price (typically 20%). And, if you live in one of the units, you’ll be able to offset your housing costs with the rental income from the other units.

House Hacking Tax Benefits

If you’re thinking of buying a home, you may be wondering if there are any tax benefits to doing so. After all, owning a home is a big financial investment, and you want to make sure you’re getting the most bang for your buck.

One way to make owning a home even more affordable is to “house hack.” House hacking is when you live in part of your home and rent out the other part (or parts) to tenants. This can be a great way to offset your mortgage payments and other ownership costs.

And, as it turns out, there are some tax benefits to house hacking, too. Here’s what you need to know about the tax benefits of house hacking:

1. You May Be Able to Deduct Mortgage Interest

One of the biggest tax benefits of owning a home is that you may be able to deduct the interest you pay on your mortgage. This is a huge benefit, as it can save you a lot of money over the life of your loan.

To deduct mortgage interest, you’ll need to itemize your deductions on your tax return. This means that you’ll need to total up all of your eligible expenses and claim them on your return.

Mortgage interest is just one type of deduction you can itemize. Other common deductions include state and local taxes, charitable donations, and medical expenses.

2. You May Be Able to Deduct Points Paid on Your Mortgage

In addition to deducting the interest you pay on your mortgage, you may also be able to deduct any “points” paid at closing. Points are a type of fee that you pay to get a lower interest rate on your loan.

One point equals 1% of your loan amount. So, if you took out a $200,000 loan and paid two points at closing, you could deduct $4,000 on your taxes.

3. You May Be Able to Deduct Property Taxes

Another potential deduction for homeowners is property taxes. Property taxes are levied by state and local governments and are based on the value of your home.

The amount of property tax you pay will vary depending on where you live. But, in general, you can expect to pay around 1% of your home’s value in property taxes each year.

4. You May Be Able to Deduct Mortgage Insurance Premiums

If you put less than 20% down on your home, you’re likely required to pay for mortgage insurance. Mortgage insurance protects the lender in case you default on your loan.

The good news is that you may be able to deduct the premiums you pay for mortgage insurance on your taxes. This deduction is available for both private mortgage insurance (PMI) and Federal Housing Administration (FHA) mortgage insurance.

5. You May Be Able to Deduct Home Office Expenses

If you use part of your home for business purposes, you may be able to deduct some of your expenses on your taxes. This includes expenses like utilities, insurance, and repairs.

To deduct home office expenses, you’ll need to calculate the percentage of your home that is used for business purposes. For example, if your home office takes up 10% of your home’s total square footage, you can deduct 10% of your eligible expenses.

6. You May Be Able to Deduct Capital Gains Taxes on the Sale of Your Home

When you sell your home, you may have to pay capital gains taxes on the profit you make. However, there are some exceptions that may allow you to avoid paying these taxes.

One exception is the “primary residence” exclusion. This exclusion allows you to exclude up to $250,000 (or $500,000 for married couples) of capital gains from the sale of your primary residence. To qualify, you must have lived in your home for at least two of the past five years.

Another exception is the “reinvestment” exclusion. This exclusion allows you to avoid paying capital gains taxes on the sale of your home if you reinvest the proceeds into another primary residence. There are some restrictions on this exclusion, so be sure to talk to a tax professional before claiming it.

7. You May Be Able to Deduct Losses on the Sale of Your Home

If you sell your home for less than you paid for it, you may be able to deduct the loss on your taxes. This is known as a “capital loss.”

Capital losses can be used to offset other capital gains you may have (such as from the sale of stocks or investments). Or, they can be used to offset up to $3,000 of other income (such as wages or interest).

8. You May Be Able to Deduct Moving Expenses

If you move due to a change in job location or other qualifying reason, you may be able to deduct your moving expenses on your taxes. This includes expenses like transportation, storage, and lodging.

To qualify for this deduction, your move must meet certain requirements. For example, your new job must be at least 50 miles away from your old home. Be sure to talk to a tax professional before claiming this deduction.

9. You May Be Able to Deduct Home Improvement Expenses

If you make improvements to your home, you may be able to deduct the cost of those improvements on your taxes. This includes things like adding a new room, remodeling a kitchen or bathroom, or installing new windows or doors.

To deduct home improvement expenses, you’ll need to itemize your deductions on your tax return. The deductions will then be applied to the “basis” of your home (which is typically the purchase price plus the cost of any improvements made).

10. You May Be Able to Deduct Energy-Efficient Home Improvements

In addition to regular home improvement expenses, you may also be able to deduct the cost of certain energy-efficient improvements. This includes things like solar panels, energy-efficient windows, and insulation.

To qualify for this deduction, the improvements must meet certain energy-efficiency standards set by the IRS. The deduction is then applied to the basis of your home (as described above). You may be able to get a rebate if you take action by 2025.

House Hacking Help

If you’re looking for a way to get into the real estate game, house hacking is a great option. Not only can you save money on your own housing costs, but you can also take advantage of some great tax benefits. Find a local real estate investment group or real estate agent to help you.

House hacking can be a great way to get started in real estate investing and save money on your taxes. If you’re thinking about house hacking, be sure to consult with a tax professional to make sure you take advantage of all the tax benefits available to you.