As homeowners face rising monthly expenses for utilities, insurance, property taxes and loan payments, they may look around their home and see potential revenue from an unused basement.
Fantasizing about paying off bills with rental income may lead some to leap into landlord mode, but some important considerations should be addressed first.
While regulations vary from one jurisdiction to the next, homeowners should check local rules to see if renting part of their home is legal.
Other legal concerns include how situations will be handled such as a tenant failing to pay the rent or damaging the property.
In addition, there are tax implications to becoming a landlord. Perhaps most important, homeowners need to consider the impact on their personal lives of having a tenant share their home.
Examples of pleasant landlord-tenant relationships are abundant, but there are also some frightening scenarios of disastrous situations.
“I had a client who inherited the family home after her mother passed away,” says Nancy Wilson, a Realtor with Evers & Co. in the District. “My client was planning to move out of town and then decided to rent the basement to a couple to make some income for a few months while she looked for another home. The renters stopped paying the rent after three months. She told them they needed to move so that she could make home improvements and sell the home, but they kept delaying the date of their move.”
Ms. Wilson explains that in the District, it can be very difficult to evict a tenant. Her client hired a lawyer and filed eviction papers, but it still took from August to April for the tenants to be removed from her home, delaying her repair work and the sale of the home.
“The city laws say that you must keep the utilities on even if the rent is not being paid and (that) you cannot evict someone if the temperature is below 40 degrees or if it is raining,” Ms. Wilson says.
In the District, homeowners who rent a basement apartment to tenants must obtain a Basic Business License, an inspection and approval from the Building and Land Regulation Administration and a Certificate of Occupancy before renting the space. Check regulations at the District’s Department of Consumer and Regulatory Affairs Web site (www.dcra.dc.gov).
In addition, all tenants in the District, even if they are renting only a bedroom, have the first right of refusal to purchase the property if it is placed on the market.
“Everyone considering renting out a basement needs to be well aware of the rules and regulations relating to landlords and tenants,” Ms. Wilson says.
Aaron Stein, an attorney with Aaron Stein Settlements in Gaithersburg, says that the first step homeowners should take is to determine whether they can rent out their basements at all.
“Different jurisdictions, such as the town of Rockville, or Montgomery County, have different rules which govern basement rentals,” says Mr. Stein. “In Montgomery County, a basement apartment can be rented as long as you register the apartment with the county.”
The Montgomery County Office of Landlord-Tenant Affairs (www.montgomerycountymd. gov/hca) provides consumers with general information on room rentals. This county distinguishes between room rentals, which have shared kitchen facilities, and accessory apartments, which include a private kitchen and must be licensed by the county.
In Virginia, rentals within a single-family home, town home, duplex or condominium are not covered by the Virginia Residential Landlord and Tenant Act (VRLTA) unless the landlord owns five or more rental units.
General and Fairfax-specific information about landlord and tenant rights can be found on the Fairfax County government Web site. (www.fairfaxcounty.gov)
Arlington County residents can contact the Housing Information Center at 703/228-3765 or visit the Web site (www. arlingtonva.us/Departments/CPHD/housing) to obtain a copy of the “Landlord Package,” which provides basic information for homeowners who want to rent their property.
In addition to determining whether a basement rental must be registered, there are other regulations that can affect the ability to rent a property. For example, Mr. Stein says there are codes that can affect rentals such as the number of people who can live in a home, especially if they are not related.
“In most Northern Virginia jurisdictions things have gotten more complicated because building codes have changed,” says Greg Riegle, an attorney with McGuireWoods in Tysons Corner.
“The requirements for egress from a basement in case of a fire are much stricter than they used to be, so homeowners are finding it more complicated to refinish a basement,” he says. “From the homeowners’ perspective, the challenges on the permitting side may mean it’s just not possible to fix up a basement as a rental.”
Mr. Riegle says homeowners should get information on the Internet or in person from their local government to make sure they are in compliance with all rules.
“It’s really important for homeowners to work with a lawyer to get a written lease agreement which covers all the potential problems,” says Mr. Riegle. “It’s easy to assume that nothing will go wrong, but in actuality, there are a lot of things that can go wrong and hiring a lawyer for a lease agreement should be a minimal cost.”
Mr. Riegle says bar association Web sites can match consumers with a lawyer with real estate experience. He recommends that homeowners put in writing agreements about the rent, security deposits and what the rights are of either party to terminate the lease.
“You need an objective way to say this rental is just not working out,” says Mr. Riegle.
Mr. Stein says having an attorney draw up a lease acts like an insurance policy for the homeowner, a protection if anything goes wrong.
“Having a lawyer involved is a good idea not only if the tenant is doing something wrong, but also if you are doing something that the tenant doesn’t like,” says Mr. Stein.
Mr. Stein also points out that homeowners should check with their lender before committing to renting out a portion of their home.
“Certain types of government loans that require the borrower to be the owner-occupant may prohibit renting part of your home,” says Mr. Stein.
Other financial considerations include the tax implications of renting a portion of your home.
Michael Martin, an accountant and enrolled agent with the IRS in Washington, says that, as with most tax laws, nothing is simple. He recommends talking with a tax attorney or accountant to determine the tax consequences for each individual household.
“First, it’s important for homeowners to know that they are liable for reporting all the income received for the rental,” says Mr. Martin. “However, you are allowed to deduct your expenses.”
Mr. Martin says you can deduct 100 percent of “direct expenses” such as new locks or professional carpet cleaning prior to the rental.
“Major items are considered a capital expense, which include things like a new kitchen or bathroom, (and) must be depreciated over time,” Mr. Martin says.
“Indirect expenses,” which may be deducted, include a portion of the mortgage, real estate taxes and usually a portion of the utility payments if the utilities are not separately metered for the basement.
“Usually these deductions are determined by looking at the home office deduction, which is calculated in a similar way,” says Mr. Martin. “The homeowner needs to figure out what percent of the home is the rental portion, and then allocate that percent across the board for the mortgage, real estate taxes and utilities.”
Mr. Martin says that the IRS regulations concerning the business use of a home applies to both a home office and the rental of a portion of the personal residence. The IRS publication 527 Residential Rental Property provides additional tax information for landlords, including those who rent part of their home to a tenant. (www.IRS.gov)
Once homeowners have determined the legal and tax ramifications of renting a basement, they face the daunting task of choosing an appropriate tenant.
Ms. Wilson recommends students as tenants since they are usually there for a short term.
“Referrals and word-of-mouth are the best way to find good tenants,” says Ms. Wilson. “But I would also suggest contacting the housing office of each of the local universities, especially those with grad students, to ask about putting up a notice for a rental.”
Checking references and a credit report are crucial to choosing an appropriate tenant, but Ms. Wilson also says that she personally believes that a gut reaction can go a long way to picking a good tenant.
“I’ve seen some landlord-tenant situations go awry, but they can also be wonderful for both sides,” Ms. Wilson says. “You just need to be aware of the laws and carefully screen your tenants.”
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