From higher taxes to getting refused for a new mortgage.
This article originally appeared on Money.
If you’ve ever wanted to make a little extra money on the side by listing your sofa, spare bedroom, guest house or even whole house on a service like Airbnb, you’ve probably wondered just how much money you could make.
After all, there are all those stories of people paying their monthly mortgage payments or annual tax bills through their rental income. What a great way to put an asset you already have to good use, right?
Yes, if your situation is right for the opportunity. When managed properly, these rentals can end up bringing in more than a traditional monthly rent can, though it does require significantly more work due to the constant turnover of renters.
As with any business, though, there are risks that could end up undermining any money-making opportunity your spare sleeping spot might afford. That’s why it’s a good idea to exercise caution and do your due diligence before jumping in.
Here are five things that could end up costing you money as an Airbnb host.
Higher Insurance Premiums
Yes, it’s true that Airbnb provides Host Protection Insurance, providing primary liability coverage for up to $1 million per occurrence in the event of a third-party claim of bodily injury or property damage related to an Airbnb stay. But that doesn’t mean you’re not going to need to alert your homeowners insurer that you’re operating as a rental property, even on a part-time basis.
For example, I have a guest house that I considered making available on Airbnb and I talked to my insurer about how that would impact my coverage. In a nutshell, my premiums would have doubled, significantly impacting any income I would’ve made from listing on Airbnb. I decided it wasn’t worth the hassle. Now, sure, I could’ve chosen not to tell my insurer about the rentals and just contact Airbnb with any claims, but that left me feeling very exposed when it came to, well, a lot of things.
As Galen Hayesis, president of El Sobrante, California-based Hayes Insurance, recently wrote for PropertyCasualty360.com, the coverage leaves a lot of gaps for homeowners:
— “Coverage is limited to $1 million per occurrence, $2 million per location. The policy aggregate is $10 million for all insured locations in the U.S. Shared limits are not your friend.”
— “Coverage is in excess of any other available coverage. The host must submit the claim to his homeowners insurance and the claim must be denied by that company before Airbnb’s insurance will pay. Presumably, the homeowners insurance may also be cancelled for business use.”
— “The summary document lists these other “key” exclusions: (1) intentional acts (of the host or any other insured party), (2) loss of earnings, (3) personal and advertising injury, (4) fungi or bacteria, (5) Chinese drywall, (6) communicable diseases (7) acts of terrorism, (8) product liability, (9) pollution, (10) asbestos, or lead or silica, and (11) insured vs. insured (i.e., host sues Airbnb or vice versa).”
— “The coverage is limited to an actual stay, not a booking. No show — no coverage. Overstay or early arrival? No coverage.”
“What if a guest breaks into the host’s gun safe, steals guns and goes on a crime spree? Is there coverage for the host from any ensuing lawsuits? Probably not,” Hayesis wrote. “Vacation rental websites like Airbnb are doing their best to protect themselves by offering what looks like insurance to their hosts. But hosts are shouldering a lot of risks with limited protection. So before you sign up or rent your home again, you may want to think twice. The bottom line appears more red than green.”
Airbnb did not respond to Credit.com’s request for comment, but does provide the following on the Airbnb website:
“Here are some examples of what the Host Protection Insurance program should cover:
— A guest breaks their wrist after slipping on the rug and brings a claim for the injury against the host.
— A guest is working out on the treadmill in the gym of the apartment building.
— The treadmill breaks and the guest is injured when they fall off. They bring a claim for the injury against the host and the landlord.
— A guest accidentally drops their suitcase on a third party’s foot in the building lobby. The third party brings a claim for the injury against the host and the landlord of the host’s building.
Some examples of what the Host Protection Insurance program doesn’t cover:
— Intentional acts where liability isn’t the result of an accident.
— Accusations of slander or defamation of character.
— Property issues (ex: mold, bed bugs, asbestos, pollution). Auto accidents (ex: vehicle collisions).”
Turned Down for a Mortgage or Other Home Financing
Banks also are closely scrutinizing how properties are being used when it comes to writing new mortgages and even refinancing. The issue is primarily about how to classify loans for homeowners hosting through Airbnb and other services Are they a primary residence? An investment property? Both? Mortgages on investment properties have traditionally been viewed as riskier.
One example is Brad Severtson, a resident of Seattle whom the Wall Street Journal recently profiled. Severtson had reportedly earned about $30,000 in 2015 renting out a cottage in his backyard. The Journal reported that he thought the extra income would work in his favor when he wanted to refinance a home-equity line of credit.
“The bank turned him down, saying it didn’t allow home-equity lines of credit on properties in which the homeowner is operating a business, including Airbnb,” the Journal reported.
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Yep, if you’re making rental income, you’re going to be expected to pay taxes on it. Airbnb says on its website “as a host, your earnings may be subject to U.S. income taxes. To assist with U.S. tax compliance, we may collect your taxpayer information. Even if you’re not a U.S. taxpayer, we may still require certain information from you.”
There are some exceptions to keep in mind, though.
According to the Internal Revenue Service, if you use your home or vacation property as a personal residence and rent it for fewer than 15 days in a calendar year, you do not have to claim that income on your personal taxes. In this case, do not report any of the rental income and do not deduct any expenses as rental expenses.
Likewise, if you rent your home or vacation property to others that you also use as a personal residence, limitations may apply to the rental expenses you can deduct, according to the IRS. You are considered to use a dwelling unit as a personal residence if you use it for personal purposes during the tax year for more than the greater of 14 days or 10% of the total days you rent it to others at a fair rental price.
It is possible that you will use more than one dwelling unit as a personal residence during the year. For example, if you live in your main home for 11 months, your home is a dwelling unit used as a personal residence. If you live in your vacation home for the other 30 days of the year, your vacation home is also a dwelling unit used as a personal residence, unless you rent your vacation home to others at a fair rental value for 300 or more days during the year.
Losing Your Lease
If you have a landlord and want to host on Airbnb, the very first thing you should do is talk to your landlord and get their permission to advertise your sofa, your spare bedroom or the whole property. And get it in writing.
There are literally hundreds of horror stories of folks not talking to their landlords, only to be sued or have their leases terminated as a result.
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Being Cited for City Ordinance Violations
Many cities have restrictions about hosting on sites like Airbnb, whether you are a homeowner or a renter. That’s why it’s a good idea to first check on the Airbnb site about what regulations may apply and then follow up with your local government. The last thing you want is to be cited for being in violation of local ordinances.
As Airbnb states on its site, “When deciding whether to become an Airbnb host, it’s important for you to understand the laws in your city. As a platform and marketplace, we don’t provide legal advice, but we do want to give you some useful links that may help you better understand laws and regulations in your town, city, county, or state.”