Owning rental property used to be an endeavor of the wealthy. But in the new sharing economy, legions of people have become mini-entrepreneurs. Thanks to Airbnb and other sharing sites, anyone can easily offer up a couch, a spare room or the entire house for a short-term rental (usually defined as fewer than 30 days). However, there’s more to renting out your extra space than simply pocketing the cash. If you’re thinking of becoming a landlord in your own home, keep the following in mind.
First, you must navigate the various rules. Start by checking with your homeowners association and neighborhood zoning laws to see if short-term rentals (STRs) are allowed and under what conditions. Your city or county may also have restrictions and requirements. For example, Denver requires property owners to obtain a Short-Term Rental license. The city also requires renters to pay a 10.75% Lodger’s Tax, Occupational Privilege Tax, and any other applicable taxes or fees associated with their rentals. Aurora recently approved legislation that requires property owners to obtain a STR license that must be renewed every two years. Owners also must pay the city a per-guest lodging tax of about 8 percent. Boulder allows STRs, but only for 120 days a year. It also imposes a 7.5 percent lodging tax on STRs. The Boulder STR tax applies to property owners only and does not detail regulations for secondary properties or long-term rentals.
Other jurisdictions in the Denver Metro area, however, have not yet updated their laws to address sharing-economy rentals. As vacation rental websites generally take a hands-off approach to local laws, it will be up to you to determine the legalities of renting your home. Your city council or government website will be the best place to start your research. It is important to remember that STRs are accessory to primary residential use, meaning the overall character of your property should remain residential.
Then there are federal and state income tax consequences from STRs. If you rent out your home for 14 or fewer days a year (e.g. when a big convention or tournament comes to town), you do not have to report the rental income. However, if your rentals exceed 14 days a year, you’ll owe income tax on your rental income. Report your rental income on Schedule E of your Form 1040 (your state and city will want to know about your rental income, too).
Of course, you can deduct costs related to your STR activity on Schedule E as well. You do not have to divide expenses that pertain solely to the rental part of the property. For example, if you paint a room that you rent and purchase new sheets and towels for that room, your entire cost is deductible. On the other hand, if an expense is related to the whole house, such as home mortgage interest or utilities and maintenance, you must divide the expense between rental use and personal use. You can use any reasonable method for dividing the expense. Consult IRS Publication 527, Residential Rental Property (Including Rental of Vacation Homes), for more details. Remember, you are treated as using your home for personal purposes each day of the year, regardless of how many days you might have rented a portion of it. As a result, rental expenses can only reduce rental income to zero, they cannot generate a loss.
Other things to check before renting that extra space is your homeowners insurance and the applicable landlord-tenant laws. You want to be protected if a tenant steals something, causes fire or water damage, or suffers an injury on your property and holds you liable. Consult with your insurance agent regarding what will be covered or excluded. Depending on how many rental days and tenants will be involved, you may have to switch policies which probably will cost more. Also, review the Colorado Landlord-Tenant laws which may vary from county to county or city to city. For example, you probably are not legally allowed to enter your tenant’s room without giving advance notice. It may be your house, but the tenant is king as far as that rented room goes. You will be responsible for complying with all laws applicable to your unique rental situation.
These are just some of the considerations to keep in mind before putting a paying guest under your roof. The applicable local rules and statutes are numerous and can be confusing. And as is often the case, understanding the tax consequences of renting just a portion of your home or the entire residence is not a simple matter. At Anderson & Jahde, PC, we can help you navigate these waters and avoid penalties.