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Purchasing real estate or using an existing property for short-term rentals has recently become a popular area of investment. The term “Airbnb” has become synonymous with these short-term rentals. However, it is important to understand that Airbnb.com has simply created a marketing community for these short-term rentals. While there are other companies which book these short-term rentals, such as Trivago, Booking.com, Expedia, Hotels.com and many more, it seems most people recognize homes turned into short term rentals by the term Airbnb. However, the focus of this blog is to address some of the legal concerns of the investor.
- Local laws and Ordinances. Be sure to check City Ordinances or Restrictive Covenants as to whether short-term rentals are allowed on the property being considered. Additionally, determine if your state has passed any state statutes governing these types of rentals. In North Carolina, the Vacation Rental Act (N.C.G.S. Chapter 42A) has been adopted specifically for these types of rentals. I will address the Landlord’s rights and requirements under this act in a later blog.
- Tax Implications. Most people probably already understand that income derived from their short-term rentals is subject to income tax. However, some states have started imposing an Occupancy Tax on these short-term rentals. Hotel lobbyists continue to push for the Occupancy Tax to apply to short-term rentals Although most states don’t require it, investigate whether your location would subject you to any Occupancy Tax.
- Insurance. Do not operate without adequate insurance that specifically covers short term rentals.
- Sole Proprietorship, LLC or Corporation? While insurance may cover any liability resulting from a law suit, there is always a chance of a judgement exceeding coverage or a debt is created not covered by insurance. With a sole proprietorship, you will be personally responsible and the debt may attach to your non-business property. I recommend operating through another entity for the purpose of protecting your personal assets. This liability protection is most commonly accomplished through a corporation or a limited liability company (LLC). I was recently approached by a client who was advised they should use a Limited Partnership. After looking at the pros and cons, the client decided a Limited Liability Company addressed their needs best. It is most commonly chosen over the corporation because the heirs to the owners will get a stepped up basis. Meaning their children will pay no capital gains tax if they were to sell the property shortly after they inherit it.
- Safety. Currently, most states don’t require these short term rentals to comply with the more stringent regulations of hotels and similar businesses. However, providing things like a first-aid kit, fire extinguishers and keeping the property in good repair may provide an adequate defense in the case of a law suit. Also check your insurance policy or talk to your agent as to what may be required. Failure to meet requirements of the policy may void coverage.
We at Cartner & Cartner, PA are happy to help choose and establish your investment vehicle and address areas where the corporate veil may be pierced in order to provide the best protection for your investment and your personal assets. After you find that idea location we would love to conduct the real estate closing on your chosen property.