The Accidental Landlord's Guide to California Rules

What is an accidental landlord?

Someone who did not set out to own a rental. You inherited a house. You kept the old one when you bought the new one because the rate was too good to give up. A parent moved in with family and the house sat empty.

However you got here, California does not have a lighter set of rules for people who did not plan on it. Here is what applies to you starting the day someone pays you rent.

The security deposit rules changed, and most owners missed it

This is the single most common mistake we see, and it is an expensive one.

Under California Civil Code section 1950.5, a landlord may demand a security deposit of one month's rent, in addition to the first month's rent. That is the rule for most owners.

There is a narrow exception: a landlord who is a natural person, or a limited liability company whose members are all natural persons, and who owns no more than two rental properties totaling four or fewer dwelling units, may demand up to two months' rent in addition to the first month. That exception does not apply where the prospective tenant is a service member.

Most accidental landlords fall inside the small-owner exception. Many do not, and do not realize it — a house held in a family trust with a corporate trustee, or an LLC with a corporate member, is not the same thing.

Collecting more than the law allows is not a paperwork error. It is a claim the tenant can bring.

The 21-day clock

When a tenant vacates, you have 21 calendar days to return the deposit with an itemized statement showing the basis for and amount of any deduction.

You must include copies of supporting documents — bills, invoices, receipts or photographs — unless the deductions total under $125 or the tenant waived documentation.

Twenty-one days sounds generous until a tenant moves out on a Friday, you are waiting on a carpet cleaner's invoice, and three weeks disappears. Start the day they hand you the keys, not the day you get around to the walkthrough.

Rent increases are capped, probably not for you, conditionally

The Tenant Protection Act caps annual increases at 5 percent plus the change in the cost of living, to a maximum of 10 percent, with one increase permitted in any 12-month period. Just-cause eviction protections attach once a tenant has been in place for the defined period.

Most single-family homes and condominiums are exempt from the caps — unless owned by a corporation. Housing with a certificate of occupancy issued within the last 15 years is also outside the caps.

Two cautions on that exemption. First, it is conditional: it depends on providing the tenant the required written notice, in the lease or by separate notice. An owner who never gave that notice may not have the exemption they assumed. Second, cities can be stricter than the state floor. Check your city's ordinance, not just the state rule.

Your insurance is wrong

A homeowner's policy covers an owner-occupied home. The day a tenant moves in, you need a landlord policy — different coverage, different liability, different loss-of-rent provisions.

Owners who skip this find out at the claim, which is the worst possible moment. Call your carrier the week you decide to rent, not the week after someone moves in.

Your lender may care

If you bought the house with an owner-occupancy requirement, read the note. Occupancy clauses are real. Most have a defined period after which renting is fine, but "most" is not "yours." Look it up before you sign a lease.

Your taxes change in both directions

Rental income is reportable. Rental expenses are deductible, including depreciation — which is not optional, and which gets recaptured when you sell.

And there is a clock. If this was your primary residence, the federal exclusion on gain requires you to have lived in it for at least two of the five years ending on the sale date. Rent it out long enough and that exclusion expires. For a California owner sitting on years of appreciation, that is a large number to lose by inattention.

Talk to your CPA in the first month, not in the year you sell.

Get the lease right

A handshake with a cousin's friend is how most accidental tenancies start and it is how most of them end badly.

Use a current California lease form. Include the rent cap exemption notice if it applies to you. Document the condition of the property with dated photographs before move-in. Put every agreement in writing, including the ones you make later by text.

Screen the same way every time

Set your criteria in writing before you advertise — income standard, credit standard, rental history, screening fee handling — and apply them identically to every applicant.

This matters for two reasons. It is how you avoid approving a tenancy you will regret. And consistent, documented, identically-applied criteria are the foundation of fair housing compliance. Deciding case by case on instinct is where owners get themselves into trouble without ever intending to.

The first four things to do

1. Call your insurance carrier and convert the policy.
2. Read your mortgage note for an occupancy clause.
3. Confirm your deposit limit under section 1950.5, and whether the small-owner exception applies to how you hold title.
4. Call your CPA about depreciation and the five-year residence clock.

None of these take long. All four are much cheaper now than after a dispute.