Bonus:  It's not taxable.

I max out my 401k each year to receive company match and reduce taxable income.  

Your cash flow will be taxed at your normal taxable rate.

This is a great school district and we are thinking we might want to move back here when our newborn is of school age (in 5 years), which is why we are leaning towards renting it so we can return.3) In looking at tax benefits of renting I can't seem to get my taxable income to be less than the actual cash I'm making in a year.  

The increase of the basis will help you minimize the taxable gain when you eventually sell the house.2) Improvements made on the rented side will also be added to the basis, but you can depreciate the improvements on the rental side and deduct depreciation against the rental income.

@Patrick McCandlessYou can do this, but the gain is likely so minimal as to not be beneficial.When you take a distribution from an IRA, the amount distributed is taxable income to you.  

I now understand the value of a margin of safety (have much more investment income than you need because it's always easier to do something with excess income than it is to make up a shortfall of income).Question: If you spend time on a hobby you really enjoy doing and the hobby happens to bring in more money than you spend on it (taxable income), is it still a hobby?

Our goal is retire in 10 years while the kids are still at home living on REI cash flow; saving our 401ks, pensions and taxable accounts for later years.

We’re hoping to do more of this in 2020 now that our investments are generating some more significant taxable gains. 

Spend more than 500 hours on the short-term rental business.Do substantially everything for the short-term rental business.Spend more than 100 hours on the activity, with no other individual surpassing your time commitment.Engage in a significant participation activity for more than 100 hours, with your combined activity in all significant participation activities exceeding 500 hours.Participate in the business for five of the previous 10 taxable years.Engage in a personal service activity (non income-producing) for three of the previous taxable years.Demonstrate regular, continuous, and provable participation in the business for more than 100 hours.If these benchmarks are met then your income would no longer be considered passive but active and any losses could then be used to offset other active income ...