Ask An Agent: What Steps Do I Need to Take to Make My Rental Legal?

• November 10, 2009

by Mark Wellborn

Takoma Park Porch by Chris Spehr

In this week’s installment of Ask An Agent, a couple buying a home with a basement rental unit inquires about what steps need to be taken in order to make sure that the unit is rented out in accordance with the law. Long & Foster’s Meg Finn offers up some insight.

Question: My wife and I are in the process of buying a home in the city of Takoma Park, Maryland, with FHA financing.  We’re hoping to supplement our income by renting out the one-bedroom basement.  We are familiar with the building code requirements such as the need for a separate egress and the bedroom must have a window and closet.  But is it legal to do this with a home that was purchased with FHA financing, and how do you go about making sure that it is done within the legal and income tax frameworks of federal, state and city authorities?  We are both committed to doing this legitimately, not on the sly. 

Answer: Montgomery County and the City of Takoma Park are very supportive of owners renting out basements as well as other parts of the house; it is a very beneficial arrangement for all involved, providing affordable housing in a pleasant environment for the tenant, and giving the owner some extra cash and often congenial company. In a single-family owner occupied house, the term for this housing is “accessory apartment.”

As far as renting out the basement, it doesn’t matter what kind of loan you have, FHA or conventional. However, what you must do (in order for the rental to be considered legal) is apply for an Accessory Apartment Rental Facility License from the Montgomery County Department of Housing and Community Affairs and a special exception for the accessory apartment from the Montgomery County Board of Appeals. These steps involve a fair amount of paperwork but the county wants to help you make this happen (they’re well aware of the shortage of affordable housing in the area).

If you go to the Montgomery County website they have a very handy “Accessory Apartment Fact Sheet”. One thing that the fact sheet states is that you have to have owned the property for one year before renting, and the county will come and inspect the unit (factors they look for include egress, ceiling height and ample parking). After you are licensed, the county will inspect once a year; if you’re in good shape it becomes every two years.

You also need to notify the Takoma Park Housing Department about your apartment, and you will need to take a landlord course that the city periodically offers. Takoma Park also has a well known rent stabilization law (“rent control”) which is only partially applicable to accessory apartments—you can only raise the rent once a year and you must give two months notice. I live in Takoma Park and one thing I can almost guarantee is that you won’t have any trouble finding a tenant!

Lastly, you do need to declare the rental income on your taxes, but you also get to write off some of your expenses.

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4 Comments

1. Stacey said at 5:56 pm on Tuesday November 10, 2009:

   Great topic, would love to hear it answered from the D.C. perspective.
   In particular, with D.C. real estate listings I am curious what the legal difference is considered between having a legal basement rental unit and those spaces advertised as an “in law suite”—what are the different permit/legal/tax responsibilities.  Is there something different in D.C. law between renting out an “in law suite” and just an extra room in your house?

1. Jeanne said at 6:16 pm on Tuesday November 10, 2009:

   I wonder how many rental units in DC and MD area are actually legit. Interesting piece.

1. Pat said at 2:20 pm on Thursday March 11, 2010:

   My hubby and I are planning to buy a condo en Prince William county VA, same exact question but from VA perspective.

1. hamptons real estate said at 1:21 pm on Thursday June 3, 2010:

   Good article.  I have been thinking of renting out my guest house, and this is very informative.