With liability in mind, insurance becomes a major issue.
Homeowners and real estate investors often turn to short-term rentals as a way to make money through services like VRBO and Airbnb. This approach can be profitable, but you need to be aware of the legal considerations before diving in.
Local and HOA Rules
Municipalities and homeowners’ associations often have rules restricting the usage of residential properties. If you’re part of an HOA, make sure to brief your interest in short-term rental with the association. Likewise, talk with your locality about its regulations regarding short-term rentals. Zoning laws may prevent short-term rentals because they’re commercial operations, for example.
It is also wise to keep your ears open for possible changes since many regulators are just starting to catch up with the short-term rental trend. Depending on the circumstances, you may need to get a business license or certify as a short-term rental operator.
Taxes
Short-term rental income is reportable in many cases. There is a so-called 14-day rule at the federal level that allows homeowners to avoid paying taxes if they only rent the property for 14 or fewer days per year. Homeowners also must reside there for 14 days per year. If your use of the property doesn’t meet both of these requirements, then you’ll need to file a Form 1099-K with the IRS. Also, be aware that companies like Airbnb or VRBO may submit your income to the IRS regardless. You might have to make the adjustments yourself when you pay taxes.
Liability
Multiple liability issues can surface, especially if you don’t have a strong rental agreement. Rental property owners may be held liable for injuries that occurred due to their negligence. Hazards may include the classic issues that all homeowners face, such as slip-and-fall accidents, property damage and theft. However, there may be additional liability issues due to health, privacy and even criminal activity. Make sure you have an ironclad agreement in place before renting the property even once.
Forming a limited liability corporation is a common approach for running a short-term rental business. An LLC insulates your assets from the company, effectively creating a firewall so that a successful claim against the business doesn’t destroy your personal finances. Without an appropriate corporate structure, all successful claimants have the right to go after your personal wealth.
Insurance
With liability in mind, insurance becomes a major issue. If you rent a property out often enough, you will likely need to file an insurance claim. Know what your policy covers. Also, make sure that your insurer understands that they’re covering a short-term vacation rental. Fortunately, insurance providers are on top of the short-term rental market so most insurers should offer appropriate coverage.
Anti-Discrimination Laws
Homeowners may be reluctant at particular times to rent to potential guests. The line where this crosses into discrimination can be a thin one, though. Be careful in all of your communications to avoid potentially discriminatory language and decision-making patterns. Also, keep copies of all of your communications like texts and direct messages. Know the rules of the companies you’re renting through since they are sensitive to perceptions of discrimination. Remember, fair housing rules don’t make significant distinctions between short- and long-term rentals. A short-term rental operator should assume they’re governed by the same anti-discrimination rules as landlords.
