This fall, Pope Francis will be coming to the United States and will be in Philadelphia, Pennsylvania on September 26 and 27. It is estimated that as many as 2 million people will descend upon Philadelphia for the occasion. Due to the high demand for housing, many people see this event as an opportunity to supply their homes to papal visitors – at an extreme price. Some homeowners are offering their residences for the week for several thousand dollars. An important question may be: what are the income tax implications for this type of short-term rental?
In most cases, if you are a homeowner and rent your primary residence only for the week of the Pope’s visit, there will not be any Federal income taxes payable for the rent received. For Federal income tax purposes, your gross income includes all income from whatever source derived, including rent. (26 U.S.C.§ 61(a)(5)). Therefore, in most cases, you must include in your gross income all amounts you receive as rental income from a dwelling unit, such as a house or an apartment. If you receive rental income, you may also be entitled to deduct certain expenses, which would reduce the amount of rental income that is subject to tax. These expenses may include mortgage interest, real estate taxes, casualty losses, maintenance, utilities, insurance, and depreciation. (IRS Pub. 527).
However, there is a Federal rule that applies to those who use a dwelling unit as a personal residence but rent it for less than 15 days. (26 U.S.C. § 280A(g)). In this case, you do not have to report any of the rental income, but you also will not be able to deduct any expenses associated with that lease. Under Federal Law, if you use a residence as your personal residence and you rent it for less than 15 days, you will not have to report the income on your Federal tax return. However, if you own the property and use it solely as a rental property, or as a rental property for 15 or more days of the year, then you will have to include the rental income on your tax return. But you will also get to deduct certain expenses related to the property.
Temporary rental income for Pennsylvania income tax purposes will be subject to tax. Unfortunately, Pennsylvania taxes income derived from rent and does not provide the temporary rental exception that the Federal income tax laws allow. However, the tax implications in temporary rental situations should not be your only concern.
First, the Philadelphia Code prohibits people from renting out a room or house without first getting a Housing Inspection License from the City’s Department of Licenses & Inspections (L&I). L&I officials have said that they may be lenient on enforcement of this Code provision for homeowners looking to rent just for the Papal visit. L&I Deputy Commissioner, Ralph DiPietro, has been quoted by Philadelphia’s NBC10 as saying, “[i]f you’re living in the house and it’s a one-time thing, generally it’s not a problem”. But, he continued, “[i]f you don’t live there, and you rent it on an ongoing basis, that becomes a problem.” A Commercial Activity License likely would not be required because that license is not required for owner-occupied 2, 3 or 4 unit dwellings. Under the Philadelphia Tax Regulations, “doing business” does not include rental income generated from real property, which is the owner’s principal residence and consists of 3 or less residential units.
Second, from a contractual perspective, homeowners should have an owner-friendly rental agreement executed by the tenant, and should receive the rent and security deposit in advance. In addition, if you are a tenant, rather than an owner, and are looking to sublet the residence you are leasing, then you would have to check the terms of your lease to see whether such an arrangement is permissible. In most leases, subletting is prohibited without the landlord’s consent. If you sublet without the required consent, you run the risk of violating the terms of your lease and allowing the landlord to exercise any rights and remedies under the lease, which might include paying all of the rent that you collect from the temporary lease to your landlord, or worse, termination of your lease.
Third, from an insurance standpoint, homeowners should talk to their insurance carrier to make sure that the homeowner’s policy or renter’s policy would cover any incidents that might arise with the temporary renters of the property. A nightmare could unfold if you thought you were going to make a quick and easy financial gain by renting your residence, but instead, an accident happens and you end up being sued, having to assume the costs of litigation and a potential judgment. No one ever thinks bad things will happen, but in order to protect yourself, you have to assume the worst.
Finally, a homeowner would be well advised to run a background check on the potential tenant(s). Private services can be hired to run these types of checks.
If you see the Pope’s visit as an opportunity to make some quick cash, keep in mind that in order to protect yourself from liabilities, you will have to consider the tax implications of any rent received, and take appropriate contract, insurance and due diligence measures.
For questions, comments or additional information, please contact a member of our Estates & Trusts Group, at at 215.495.6500.