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Whether it’s your basement or a bedroom, renting out part of your house can be a welcome source of income. If you're an empty nester, it can also be nice to have someone in the house again. Regardless of why you’re thinking about taking on a tenant, though, there are important insurance issues to consider before taking the plunge. Opening your home to a renter will increase your liability, and it can also raise the risks of your house being damaged. Generally, higher risk means a higher premium in one form or another. While the rates on your current homeowner policy may not increase, chances are you're still going to need additional coverage.
Short-Term or Long-Term?
If you expect a tenant to be with you for only a short time -- less than a month, for example -- he may be considered a visitor. If so, your current homeowner policy may cover you, but you should check with your agent to be sure. In addition, if you don't notify your insurance company that you have a tenant and he gets hurt or does something to damage your property, that omission could be grounds for denying your claim. If you’re planning on a long-term arrangement, however, it’s a good idea to look at your options for coverage that's tailored to your new situation.
When Your Home Isn't Just Yours Anymore
Most homeowner insurance policies assume that your home is owner-occupied, meaning that -- give or take occasional visitors -- you and your family are the sole occupants. Adding a tenant to the mix changes things, though, because now you’re essentially insuring two separate households. If you decide to allow your prospective tenant to have a dog, for example, or if he has his own visitors, all of those factors can increase your risk. Accordingly, your homeowner policy may no longer be enough to protect you. Depending on your insurance company’s rules, you may need to amend your coverage or take out a separate landlord policy.
Offsetting the Costs With Tax Deductions
Once you factor in insurance costs, it might seem like renting out a room isn't all it's cracked up to be. If enough of the money you make from rent goes back out the window in premiums, you could conclude that it's more trouble than it's worth. Consider that when you rent out a room in your home, you become a landlord, and you're entitled to the same types of tax deductions as any other landlord. Expenses incurred in the course of operating a rental property -- even if it's only a single room in your house -- can be tax-deductible. The IRS will allow you to claim a percentage of your utility bills, repairs to the part of your home you’re renting and the extra insurance premiums as business expenses. You might even be able to write off a percentage of your mortgage.
The Accidental Landlord
The economic downturn of 2008 created many “accidental” landlords -- people who bought new houses but were unable to sell their old ones. Faced with the unpleasant reality of having to pay two mortgages, they decided to rent out the old house. If you’re in this position, you’ll need to look at your insurance coverage, too. You’ll be able to keep your current homeowner policy on the house you live in, but for your rental unit, you’ll need what’s called “dwelling insurance.” It covers any damage your tenants cause. It’s also a smart move to take out a separate liability policy to protect you if your tenant gets hurt on your property. Regardless of whether you’re renting out a single room or an entire house, you should schedule an appointment with your insurance agent. She’ll be able to give you sound advice that fits your situation.
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