Should You House Sporting, Special Event Fans?

Home owners who want to cash in on deep-pocket, short term renters in town for a big event enter a gray area of housing that's not without risks for both guests and property owners.

by Broderick Perkins
© 2008 DeadlineNews.Com

Unauthorized use of this story is a copyright violation -- a federal crime

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Deadline Newsroom - When the Superbowl, U.S. Open, World Series, Olympics, and other major sporting and entertainment events come to town, the community cashes in on an influx of visitors dining, shopping, and looking for shelter.

However, property owners who rent primary residences on a short-term basis enter a gray area of housing that's not without its risks for both guests and property owners.

Property managers recently pitched Pebble Beach, CA home owners the idea of renting their homes when the U.S. Open next visits the Monterey County area -- two years from now. The early pitch came because the potential windfall for renting out homes in the affluent California seaside community could be staggering -- as much as $10,000 a week for a home that's a short drive to the golf course to a whopping $100,000 a week for a posh home with a fairway view, according to property managers with past experience.

The two year advance notice is just about long enough to sort through what the windfall could really cost.

Generally if you rent out your home for 14 days or less you don't have to report the income.

"You get tax free income," said Leonard Williams a CPA in Sunnyvale, CA.

However, you'll likely need to consult with a tax professional if you plan to rent your home for 15 days or more because, while you can deduct rental expenses and depreciation for the part of the year the property was used or held for rental purposes, you also have to report the rental income. A major income boost could thrust you into a higher tax bracket, trigger the Alternative Minimum Tax and pile on other tax issues, says San Diego, CA CPA Leonard Wright.

Williams said renting out your home for 15 days or more will also cut into your capital gains tax exclusion, if only slightly, depending upon how long you rent your home.

Under current law, married homeowners can exclude from taxation, up to $500,000 in gains from a home sale, provided the property was the primary residence for two out of the previous five years. The maximum exclusion for a single person is $250,000.

Vacation and rental property owners, right now, can legally double dip the exclusion by first selling their primary residence and capturing the tax-free gain. Then, after moving into the second residence for two years to qualify it as their primary residence, they are able to cash in again on the tax-free gain after selling the second home.

However, to foot the bill for the "Housing and Economic Recovery Act of 2008" the act eliminates the capital gains exclusion for the portion of gain that comes while a home serves as a vacation or rental property. The provision is effective Jan. 1, 2009.

Renting out your home for a month or two could mean a relative insignificant nip into the exclusion, but there are other concerns. Unless your property becomes a long term rental, or there is a large short-term windfall, the tax issue is probably the least of your worries.

• Your homeowners insurance policy is underwritten with risk analysis based on the owner, you, occupying the home, not tenants. Effectively turning your home into a business property will likely require some adjustment to your insurance policy which may not otherwise provide benefits for claims arising from certain liabilities or losses. If a short-term tenant damages your property, steals belongings or is injured and you don't have the proper coverage you'll have to foot the bill or, worse, face the possibility of a negligence lawsuit. Always contact your insurance agent before renting your home.

• Zoning could pose a problem. A growing number of communities have an outright ban on short-term rentals, others require that you obtain a license and pay a tax for the privilege. Violate the provisions of local law and you could be fined.

• Likewise, homeowner associations that permit long term rentals may forbid short term tenants and enforce the prohibition with hefty fines, even evictions. Check with your homeowner association's board of directors or management company.

• Local occupancy ordinances may also permit only a limited number of people in a given structure and typically forbid setting up beds in garages, sheds or other facilities not legally designated for human habitation. Check the laws in your community.

• Check federal and local fair housing laws. Fair housing laws forbid you from discriminating based on sex, race, religion and other factors. You are generally exempt from the law if you own the home you rent, but not if you have several other homes. You are also exempt from federal fair housing laws if you rent a room in your home. And you are exempt from federal law if you rent to a minor, but that could open another can of worms. However, don't overlook state and local level fair housing laws. In Palm Beach County, FL for instance, if you use a "broker" (property manager) to rent your personal residence, you must comply with their fair housing law.

• You'll need time to screen renters. You can't rely upon gut feelings. There are few if any consumer and property owner protections in place that specifically cover renting out your home short-term for a local event. You'll either have to hire a property manger or learn the screening process, which could mean many pointed questions, a full application for short term rentals, a credit check, income check, proof of residence check, past rental record check and more checks before you get that fat short term rental check.

• Add real estate attorney to your list of consultants. The American Bar Association says if you open your home to short-term rentals you should do so with a legal contract that defines the terms of your accommodations. An attorney can help you sort through your legal rights and responsibilities and make sure your rental agreement complies with local law.

• Free Shelter From The Storm Not Free Of Risks

© 2008 DeadlineNews.Com

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Broderick Perkins, an award-winning consumer journalist of 30 years, is publisher and executive editor of San Jose, CA-based DeadlineNews Group -- DeadlineNews.Com, a real estate news and consulting service and Web site and the new Deadline Newsroom, DeadlineNews.Com's news back shop. In both cases, it's where all the news really hits home.

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