Roth Conversion with Rental Income: The Landlord's Guide (2026)

Owning a rental property during the Roth conversion golden window creates a specific planning challenge: every dollar of net rental income counts toward your MAGI, stacking directly on top of your conversion amount. A couple with $40,000 in net rental income has $40,000 less annual conversion room before hitting IRMAA — and in the year they sell the property, unrecaptured depreciation and capital gains can obliterate an entire year of conversions. This guide explains the mechanics, the planning calendar, and how to sequence the property sale to protect your multi-year Roth strategy.

How rental income flows to MAGI

Rental income is reported on Schedule E of your federal return. Net rental income (gross rents minus operating expenses and depreciation) flows directly to Adjusted Gross Income (AGI). For Roth conversion planning purposes, the two MAGI definitions that matter most are:

• IRMAA MAGI: AGI + tax-exempt interest. Net rental income is included.
• ACA MAGI (if you're pre-65 on Marketplace coverage): AGI + foreign income exclusion + tax-exempt interest + non-taxable Social Security. Net rental income is included.

The depreciation deduction on your rental property does reduce your MAGI — unlike some misconceptions. If your property generates $60,000 in gross rents, $12,000 in operating expenses, and $18,000 in annual depreciation, only $30,000 flows to MAGI. That's helpful while you're holding the property. The complication comes when you sell: all that accumulated depreciation becomes Section 1250 gain, taxed at a maximum 25% rate and included in MAGI for IRMAA purposes in the year of sale.

The four compression points

For a retired couple filing jointly in 2026 with no Social Security yet, $40,000 of net rental income affects the conversion ceiling in four ways:

The IRMAA ceiling is typically the binding constraint for the 55-72 demographic with meaningful IRA balances. Every dollar of rental income directly subtracts one dollar from the maximum IRMAA-aware conversion amount.

Worked example: Michael and Susan, age 67

Michael and Susan (both 67) are filing jointly. They have $1.8M in a traditional IRA, a rental property generating $35,000 net income annually (after depreciation), and $8,000/year in taxable dividends from a brokerage account. Social Security is delayed to 70.

Without rental income: MAGI floor = $8,000. They can convert up to $210,000/year while staying below the $218,000 IRMAA Tier 1 threshold ($218K − $8K = $210K).

With rental income: MAGI floor = $43,000 ($8K dividends + $35K rental). They can convert up to $175,000/year ($218K − $43K = $175K).

Annual gap: $35,000 less per year — equal to the rental income. Over their 6-year window (ages 67–73), they convert $210,000 less in total. At 7% annual return, that $210,000 kept in a traditional IRA rather than Roth grows to $297,000 by age 80 — but as ordinary income at forced RMD rates instead of tax-free Roth withdrawals.

Passive activity loss rules: when the rental shows a paper loss

Depreciation often makes rental income appear as a net loss on Schedule E even when the property throws off positive cash flow. Whether that paper loss helps you depends on your income level and participation level.¹

• Active participation (most landlords): You can deduct up to $25,000 of passive rental losses against ordinary income — but only if your MAGI is below $100,000. The $25,000 allowance phases out completely at $150,000 MAGI. For most pre-retirees in the Roth conversion window (MAGI $150K+), passive rental losses are suspended — they accumulate but cannot reduce current-year income.
• Real Estate Professional (REP): If you spend more than 750 hours per year in real estate activities and real estate constitutes more than 50% of your personal services, rental losses are not passive — they offset ordinary income without limit. This is rare for retirees not materially running their rental business.
• Suspended losses released at sale: All accumulated suspended passive losses are released and deductible in the year you sell the property. This can create a significant offset against the sale-year gain.

For most landlord-converters with MAGI above $150,000, the practical implication is: paper rental losses don't help you during the holding period, but suspended losses accumulate and create a valuable deduction in the sale year.

The property sale year: the income event you must plan around

Selling a rental property creates a layered income event that can derail an entire year of conversions:

1. Unrecaptured Section 1250 gain (taxed at 25%): All depreciation you've taken on the building is recaptured as a capital gain taxed at a maximum 25% rate — even if your regular LTCG rate is 15%. If you bought a property for $300,000, allocated 80% to the building ($240,000), and depreciated it over 27.5 years, roughly $145,000 of depreciation accrues over 17 years. That $145,000 is §1250 gain in the sale year, taxed at 25%.²
2. Long-term capital gain: The appreciation above original purchase price (less depreciation already recaptured) is taxed at standard LTCG rates (15% for most retirees).
3. MAGI spike → IRMAA two years later: Both §1250 gain and LTCG flow to AGI, pushing MAGI dramatically in the sale year. A property that generates $200,000 of capital gain can push a couple from a $218K MAGI ceiling into Tier 3 IRMAA territory for two years after the sale.
4. Suspended passive loss release: Partially offsets the gain, but only if you had losses to accumulate. Can meaningfully reduce the taxable gain.

Example — property sale impact: Michael and Susan sell the property in 2029 for $550,000 (purchased for $280,000, accumulated $160,000 depreciation). Their 2029 MAGI includes: $43K ordinary income + $160K §1250 gain + $110K LTCG = $313K MAGI. That's Tier 2 IRMAA ($274K–$342K MFJ), costing an extra $5,770/year per couple in 2031 and 2032 (two-year lookback). They should plan no large Roth conversion in 2029 — the sale income already fills their IRMAA ceiling.

Strategy: sequencing the sale around conversions

The optimal approach for landlord-converters is to treat the property sale year as a deliberate "conversion pause" and plan the multi-year schedule around it:

1. Convert heavily before the sale. In the years leading up to the property sale, maximize conversions at the IRMAA ceiling ($218K MFJ minus rental income floor). Each year of conversion reduces the IRA balance that will generate RMDs — and reduces the conversion workload after the sale year is over.
2. In the sale year, convert little or nothing. The property gain will already push MAGI well above the IRMAA Tier 1 threshold. Accept the IRMAA cost on the property gain alone; don't stack conversion income on top.
3. After the sale, resume full conversions. With the rental income gone, your MAGI floor drops dramatically. The annual conversion ceiling increases by the entire net rental income amount — an extra $35,000+ per year that can now go into Roth instead of toward the IRMAA ceiling.
4. File Form SSA-44 if the sale-year income was a life-changing event. The SSA allows IRMAA appeals for life-changing events. A one-time property sale typically doesn't qualify (it's not a reduction in income), but confirm with the SSA if you have a specific situation.

Should you sell the rental before or after the golden window ends?

Timing the property sale relative to RMD age (73 or 75) involves a trade-off:

• Sell before RMDs start: You lose the rental income floor (increasing conversion room), but trigger a large sale-year MAGI event. Works best if most conversion work is done and remaining IRA balance is manageable.
• Sell after RMDs start: RMDs already generate forced ordinary income, so the loss of rental income room matters less. The §1250 recapture still applies, but the IRMAA impact on top of RMDs may be smaller in percentage terms. Some landlords prefer to hold through RMD years and convert the rental to a more passive investment structure instead of selling.
• 1031 exchange into DST or UPREIT: If you want to defer the capital gain entirely, a 1031 exchange into a Delaware Statutory Trust or UPREIT can defer the §1250 recapture and LTCG indefinitely — eliminating the sale-year MAGI spike. The trade-off is illiquidity and continued passive income in your MAGI. Discuss with an advisor whether deferral or recognition fits your IRA depletion timeline.

QBI deduction for rental income

Under § 199A, rental income may qualify for a 20% qualified business income (QBI) deduction if the rental activity rises to the level of a trade or business. The IRS safe harbor requires 250+ hours per year of documented rental services (leasing, maintenance, supervision). Short-term rentals often qualify more easily than long-term residential rentals.³

For Roth conversion planning: the QBI deduction reduces taxable income but not MAGI. It lowers your tax bill on the rental income without creating additional conversion room at the IRMAA threshold. Valuable, but doesn't change the compression-ceiling math.

Key planning checklist for landlord-converters

• Calculate your net rental income (after depreciation) — this is your annual IRMAA-ceiling reduction.
• Map the property sale year on your conversion timeline and plan for a conversion pause in that year.
• Estimate accumulated depreciation to project the §1250 recapture hit at sale.
• Track suspended passive losses — they're a hidden asset that reduces sale-year tax.
• Use the IRMAA-aware calculator with your rental income included in the "other income" field to get accurate ceiling estimates.
• Consider whether a 1031 exchange into DST or UPREIT better fits your IRA depletion timeline than an outright sale.
• After the sale, revise your conversion schedule upward to capture the newly freed IRMAA headroom.