Housemate Trend Growing : Look Before You Leap Into Sharing

There are several potential barriers to overcome before opening up your home to a home-seeker. Not only must you clear the psychological hurdle of inviting a stranger to live in your home, you must jump through some legal, financial and insurance hoops before starting your home-sharing arrangement.

Zoning--No permit or zoning change is required to rent rooms in one’s home, says Darryl Fisher, Los Angeles city zoning administrator.

Homeowners in other municipalities, however, should check with their zoning boards. Some cities may only seek to confirm that you’re not converting your home into a boardinghouse, where a tenant receives a room, meals and services, and is excluded from sharing certain areas of the house.

Covenants--A covenant is an agreement written into the deed of each home site for an entire neighborhood that either restricts or prohibits certain housing practices. Homeowners should check these legal restrictions in their deed or with their local zoning board. Many covenants have long since been violated and forgotten, but that does not alter the fact that they remain legally enforceable, which could provide your housemate with the legal ammunition to sue should your relationship sour.

Reduction of loss of government benefits--The net income you receive from home sharing must be reported to the Internal Revenue Service on Schedule E, the Supplemental Income Schedule. Increased income from home sharing may reduce or even cut benefits, including Supplemental Security Income (SSI), food stamps and Medicaid. If you rent your home and receive rental assistance from the government, your assistance may also be adjusted.

“Before you decide to open your home, be sure it won’t cost you money,” advises Leo Baldwin, author of “Homesharing and Other Lifestyle Options.”

Increased Taxes--Increased income can affect your eligibility for certain real estate rebates, tax deferrals or tax credits. If you are making physical improvements to your property, such as adding a private bathroom, your home will have to be reappraised for tax-assessment purposes.

$125,000 Exemption--If you’re over 55 and have lived in your home three of the last five years, you may benefit from the one-time $125,000 capital gains exemption when you go to sell your home. This tax advantage may be jeopardized, however, by renting a portion of your residence.

Baldwin provided the following example: If your home has a total of 1,800 square feet of space and you rent out one-third, or 600 feet, he said, it would appear that the IRS would require you to prorate your capital gains. For example, if you purchased your house for $30,000 and sold it for $90,000, you would pay no capital gains, because your profit did not exceed $125,000. Baldwin notes, however, that it is likely the IRS would require that since one-third of the property was income-producing, one-third of the $60,000, or $20,000 would be taxed as a capital gain.

Homeowners should discuss all potential tax liabilities with their attorney or tax adviser before going ahead with home sharing, Baldwin advised.

Insurance--Your homeowner’s insurance coverage, which protects your dwelling and personal property, should not be affected when you share your home. Your policy, however, will not cover the personal belongings of your sharer. Your sharer, therefore, should buy renter’s insurance, which is usually available for a nominal fee when compared with the cost of replacing such items as computers, stereos and televisions.

What happens if your ceiling fan shakes loose and bonks your housemate on the head? Will your liability insurance be adequate to cover any claims? Discuss your coverage for personal injury or property damage with your insurance agent.

In “Housemates: A Practical Guide to Living with Others,” author Deanna Sclar says: “No matter how many precautions you take, if you are going to rent out part of your home to strangers, you should make sure you have the best insurance coverage available.”

Sclar also recommends removing any conditions that may be hazardous to children. Gate staircases, fence pool areas and cover hot tubs, for example.

Adds Sclar, “Frankly, if hazardous conditions exist on your property, it might be wiser not to rent to families with small children at all. Even if the parents agree beforehand to take full responsibility, it may make little or no difference in a court of law, should tragedy occur.”