House Hacking

The aim is to turn your largest expense into a partly self-funding asset: buy a home with room to spare, live in one part, and rent the rest. Tenant rent pays a share of the mortgage, taxes, insurance and repairs, so your own housing cost falls, and every principal payment builds home equity in a building someone else helps pay for.

Common setups are living in one unit of a duplex, triplex or fourplex; renting spare bedrooms to housemates; and renting a basement apartment or an accessory dwelling unit (ADU).

The term comes from real estate investing, not from law, so the rules come from three places: your lender’s occupancy terms, IRS rules for property that is partly personal and partly rented, and local landlord, zoning and fair housing law.

Owner-occupant loans are the main draw. FHA-insured mortgages cover homes of one to four units with a cash investment of at least 3.5% of the appraised value if your credit score is 580 or higher, or 10% with a score of 500–579. For 2026, FHA loan limits run from $693,050 to $1,599,375 for two units, $837,700 to $1,933,200 for three, and $1,041,125 to $2,402,625 for four, depending on the county. Eligible veterans and service members can use a VA-backed loan on a home of up to four units with no down payment if the price doesn’t exceed the appraised value, provided they live there.

Lenders treat expected rent cautiously. Under Fannie Mae’s selling guide, a lender qualifying you to buy a two- to four-unit principal residence counts 75% of the gross rent, backed by an appraiser’s rent schedule or leases, and if you have less than 12 months of landlord experience, that rent can only offset the property’s own payment.

FHA loans also carry mortgage insurance premiums, so include them when you run the numbers. And occupancy is a real commitment: these loans require you to live in the property, and misstating your plans on a loan application can be mortgage fraud.

Rent from a unit or a room is taxable and goes on Schedule E. The IRS treats the property as two pieces, one rented and one personal. Costs that belong only to the rental, such as painting the tenant’s unit, are fully deductible against rent. Shared costs, such as mortgage interest, property tax and insurance on the whole building, are split by any reasonable method, usually square footage or number of rooms. The personal share of mortgage interest and property tax is deductible only if you itemize.

In the IRS’s own duplex example, an owner living in one of two equal units deducts half the mortgage interest and property tax on Schedule E. You also depreciate the rental share of the building, not the land, over 27.5 years; see rental property depreciation.

A rental loss is a passive loss, but owners who actively participate can deduct up to $25,000 of it against other income. That allowance shrinks once MAGI passes $100,000 and is gone at $150,000.

The home sale exclusion shelters up to $250,000 of gain, or $500,000 on a joint return, on a home you owned and lived in for 2 of the 5 years before the sale. House hacking changes the math in two ways.

First, where the rental sits matters. If the rented space was inside your own living area, such as a spare bedroom, you don’t split the gain. If it was a separate dwelling unit, such as the other side of a duplex, gain allocated to that unit can’t be excluded unless you also lived in it for 2 of the last 5 years.

Second, depreciation comes back. Depreciation allowed or allowable after May 6, 1997 can’t be excluded under either setup and is taxed as unrecaptured section 1250 gain at up to 25%. “Allowable” means skipping the deduction doesn’t avoid the tax.

The payoff is a lower cost of living and faster equity growth, which can lift your savings rate sharply in early-career years, plus a building that can become a full rental later. It works best when the building would still suit you as a home with a unit empty. Weigh it against renting or buying a single-family home: the rent vs. buy decision with tenants added. The costs are easy to underrate: