The rental income that wasn’t
Rent isn’t what you keep.
And it’s not passive. Tenants, repairs and vacancies don’t retire when you do.
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1. What a rental really nets
Self-managing? Set management to 0 — and count your own hours, which get harder to give at 75 than at 60.
2. The illiquidity problem
A rental is a big, single asset. When you need cash — a medical bill, a market slump, a long vacancy — you can’t sell a slice of it. Your choices narrow to borrowing against it, selling all of it at a bad moment, or covering the gap from savings you were counting on for something else.
A roof, a furnace or a sewer line can wipe out a year or more of net rent. Keep a separate repair reserve, or the rental quietly becomes a drain on your TSP.
3. The taxes
- Net rent is ordinary income, stacked on top of your annuity and Social Security — which can also raise your Medicare premiums. See IRMAA explained.
- Depreciation comes back when you sell. It’s recaptured at up to 25%, on top of capital gains tax on the rest of the profit.
- Selling your former home? Once it’s a rental, the home-sale exclusion can shrink or disappear. See the downsizing math trap.
Still weighing what to do with a house? Compare the options in tapping home equity in retirement.
4. Frequently asked questions
How much of rental income do landlords actually keep?
Far less than the rent. A common rule of thumb, the 50% rule, says operating costs such as vacancy, repairs, management, taxes and insurance eat about half of the rent, before any mortgage payment and before income tax.
What is the illiquidity risk of rental property in retirement?
You can’t sell part of a house when you need cash. If you need money during a downturn, a long vacancy or a major repair, your choices are to borrow against it, sell all of it at a bad time, or cover the gap from other savings.
How is rental income taxed?
Net rental income is taxed as ordinary income. When you sell, the depreciation you claimed, or could have claimed, is recaptured at a rate of up to 25%, and the rest of the gain is taxed as a capital gain.