Renting your home for short periods using Airbnb or VRBO is a quick way to earn extra cash. But peer-to-peer home sharing involves risk and is not something you should do without research and careful consideration. Not only could your guests end up trashing your apartment, condo or house, you could face unexpected and expensive charges if a guest is hurt or damages a neighbor's property during a stay.

Below is a list of five liabilities you should know before renting your home (beyond the 3% host service fee you must pay Airbnb), along with tips on how to avoid or prepare for them.

A Guest Is Injured or Has Property Damage

One of the greatest risks is that guests will sue you because they're injured, they become ill or their property is damaged in your home. Despite taking every precaution to make your home safe, you can't predict everything. And even if a lawsuit is baseless, defending yourself can be expensive and time-consuming.

Key Takeaways

  • Before listing your residence on Airbnb, it is wise to weigh the pros and cons of home sharing.
  • Airbnb hosts must pay occupancy taxes in some jurisdictions, in addition to federal income tax.
  • Airbnb hosts may need insurance to cover potential damage or lawsuits if a guest is injured while renting from them.  
  • It is illegal to offer short-term rentals in some towns and cities, and it is advised to check your local laws before advertising your home on Airbnb. 

The best way to protect yourself is to make sure you're properly insured. Airbnb offers a liability insurance of up to $1 million. But even if the policy covers you as Airbnb says, you would probably be better off buying your own insurance.

For one thing, the Airbnb terms of service statement contains numerous disclaimers and other information that make you, not Airbnb, responsible for many aspects of renting out your home.

And there are many requirements you must meet to take advantage of the protections the site does offer hosts. The fine print is not an easy read. When we copied it from the web and pasted it into a word-processing program, it took up a staggering 70-plus pages.

A Neighbor’s Property Is Damaged

You also can be liable if a guest damages a neighbor's property, a particular concern if your home is in a multi-unit building. If a guest causes a flood or starts a fire, your neighbors could be injured or have substantial property damage.

In those circumstances, the $1 million limits of Airbnb's liability coverage may not be enough. Again, obtaining your own insurance with adequate limits is the best option. (See It's Raining Lawsuits: Do You Need an Umbrella Policy?)

When renting your home on a peer-to-peer home-sharing service, use any tools the site provides to check out the prospective renters. Airbnb, for example, lets hosts post guest reviews, which you should read before renting. 

Finally, require guests to provide a security deposit, the higher the better. Airbnb calculates the security deposit at 60% of the nightly rate, up to $1,000. Hosts can set their own deposit rates. 

You've Broken the Law

Some states, cities and towns prohibit or regulate home rentals, either directly through their municipal code or through zoning rules. Unless you're present and the guest has access to the entire dwelling, you could be in violation if you rent out a room in your New York City house or apartment. If you break the law, you could face thousands of dollars in fines.

Despite the risk of fines, Airbnb in cities like New York is big business. A 2018 study found that 12 percent of New York City's hosts are commercial operators that control multiple listings and account for 28 percent of the city's Airbnb revenue. 

Also, if you enter into a contract that's deemed illegal because it violates a local law, you may have trouble enforcing the terms and conditions. The Airbnb fine print says that it is the host's responsibility to comply with any local law.

So don't assume that renting your home in your area is legal just because Airbnb permits you to use its service. If you're tempted to proceed anyway, believing the authorities aren't likely to find out, consider that your neighbors—seeing strangers going in and out of your home—might be all too willing to file a complaint, especially if there are noisy parties or other annoying behavior.

Check with your tax advisor if you're unsure how to report the extra income on your tax return or about how it will affect your tax situation.

You've Violated Agreements

Along with local laws, renting your home could violate your lease or housing authority rules, if you're a renter; or your condo, co-op or homeowner's association agreement, if you're an owner. So check the rules before proceeding so you don't end up with an eviction notice or other penalties.

You Owe Taxes

Some jurisdictions charge occupancy taxes on home rentals. Airbnb collects the tax for you in some cases. In other instances, you'll need to collect it yourself. Massachusetts, for example, imposes a room occupancy excise tax of 5.7% on rooms rented for $15 or more each day. And the state's cities and towns can add another 6%, or 6.5% in Boston.

You also may have to pay federal and state income tax on the amount you earn from your rental. Airbnb requires hosts to submit taxpayer information. After year's end, expect to get a tax form if you earned more than $20,000.

The Bottom Line

Renting out your home on Airbnb, HomeAway or any other peer-to-peer home-sharing site can be risky, so it's important that you understand the dangers and weigh them carefully before proceeding. If you decide to give it try, take reasonable efforts to minimize your liabilities.

It's essential that you know the laws that govern home rental in your area, the potential tax consequences and the effect of any lease or other agreement you may have signed on your ability to rent out your home. Finally, be sure you've read and understood the terms and conditions for the home-sharing site, as difficult as that may be.