Laws and tax implications of short-term rentals and the new ‘sharing economy’

Taxes, Money, Real estate

With all the buzz around Airbnb, HomeAway, VRBO and other short-term home rental services, some homeowners may be wondering if temporary renting is an option for them. Should they rent out their home, a bedroom in their home or their vacation home for some extra cash?

Before lying in that bed, it’s important to understand the legal rules and ramifications that go along with renting to travelers on a short-term basis. It’s not as simple as taking out a craigslist ad and leaving the key under the mat.

Know the (very local) law

Because these private short-stay home rental services are new and emerging, the laws around them are changing too.

“Each city, state, county, long-term property manager or homeowners association can have restrictions on the type and amount of short-term rentals permitted,” said Scott Breon, chief strategy officer for Vacasa, a vacation property management and marketing company headquartered in Portland, Oregon.

“Homeowners associations and long-term housing property managers typically prohibit ‘commercial activity’ and ‘subletting,’ which short-term rentals typically fall under; so they are prohibited in nearly every high-rise building in the United States. Each city and state will have varying regulations governing short-term rentals, with some banning them outright and others limiting the number of nights you can rent.”

For example, he said, Portland outlawed short-term rentals in residential areas while Cannon Beach, Oregon, greatly limits them by letting owners rent them only once every 14 days.

Not only do state, city, neighborhood or building rules vary, but they also change frequently, notes Andrew McConnell, founder of VacationFutures, Inc. For example, New York banned most short-term rentals in 2011 while Florida considered – then rejected – plans for legislation to push short-term rental regulations down to the local level.

Check your resources and know the risks

California-based attorney C. Mario Jaramillo advises homeowners to check these resources to learn about rules governing the jurisdictions of their home locations:

McConnell suggests working with a professional company to rent your home. “Not only will these companies be better positioned to know the law and stay abreast of any changes, but they are typically licensed by the state’s real estate commissions, so will legally be on the hook to do so,” he said.

Chuck Ros, who, with his wife Lori, is renting their Atlanta home while traveling for six months in Europe, suggests having a real estate attorney draw up a lease. “The booking services like will require property owners to fall under their leaseholder agreement, and if your local legal issues are at odds with their agreement, it’s up to the property owner to identity and act on that,” he said.

Suz Garber, an Airbnb host, said the primary issue she considered prior to listing on Airbnb was guest activity. “Would they trash our place? Would they engage in illegal activities (illicit drugs or sex, etc.)? Would they respect our rights as owners by adhering to what we consider acceptable behavior?

“We were very clear on having written house rules that are posted on the site prior to anyone requesting to stay with us as well as ramifications for not abiding by the rules (i.e., losing the house key will cost you $125. No discussion.). Furthermore, upon arrival, each guest is given a copy of the house rules so there is no confusion or miscommunication as to what is expected from them,” Garber said.

All that income … may be taxed

Rental services like Airbnb generally report to the IRS the rental payments they send to their hosts each year, so the IRS will know you have such rental income and expect you to pay income tax on it, Jaramillo said. However, income tax is only due if the home is rented for more than 14 days. Note that homeowners in California may still be liable for transient occupancy taxes.

Meanwhile, certain rental-related expenses can be deducted, including advertising, credit checks, insurance, cleaning costs, repairs for the rental portion and depreciation for the rental portion.

Ros said his CPA recommends that he maintain a “service calendar” that clearly shows the dates his property is being rented. “The big caveat is that, depending on how much our property is in service in a tax year, we may lose our homeowner’s exemption, which may just be the price we pay for our travel freedom.”

Because tax remittance varies by neighborhood depending on where taxing jurisdictional boundaries are drawn, Ben Edwards, president of the Vacation Rental Managers Association, suggests that property owners hire a professional property manager who can stay abreast of all tax implications.

Bottom line? Despite the popularity of these new short-term rental opportunities, homeowners are advised to complete significant due diligence to be sure they’re protected and following the law before jumping into the rental pool.