Should Short-term Rentals Be Taxed Like Hotels?

A panel of three experts in the hospitality industry sparred over how to protect property rights while leveling the field between hotels and short-term rentals.

For Rent SignWASHINGTON – May 18, 2016 – A panel of three experts in the hospitality industry sparred over how to protect property rights while leveling the field between hotels and short-term rentals.

The discussion took place during the Realtors® Legislative Meetings & Trade Expo in Washington, D.C. last Friday. One participant – Matt Kiessling, who leads short-term rental policy for the Travel Technology Association that represents technology companies such as Expedia and Sabre Corp. – said his organization doesn't oppose taxing short-term rentals, but he fears too much regulation could end up curtailing property rights.

"What you shouldn't do is ban people from doing what they want to do with their property, especially when they aren't changing the use of that property," Kiessling said.

But Craig Kalkut, vice president for government affairs at the American Hotel & Lodging Association, disagreed. He said that taxation wouldn't hamper owners' rights and noted that the high rate of taxation of hotels makes for unfair competition.

"Our members all agree that there should be a legal and level playing field across the lodging industry," he said. "There is a difference between what could legitimately be called home sharing and what is more commercial."

One of the central questions around the debate: The different way websites that facilitate short-term rentals operate. Kiessling said that Airbnb manages the entire experience, from search to booking and payment, but other sites merely exist so homeowners can advertise their rentals.

The advertising-only websites "often don't know if a property has even been booked, so the idea that they would be able to collect and remit taxes … is nearly impossible," he said, suggesting that it should be up to the individual owners to pay taxes directly in some cases.

Kalkut doubted that local communities could get homeowners to voluntarily pay extra taxes on their own.

"If you leave it up to the individual homeowner, I don't think much will be collected," he said. He acknowledged that the process "might vary platform to platform," but Airbnb is already collecting taxes from owners in certain cities where ordinances require it. "They're a tech company, so they should be able to figure out how to collect and remit taxes."

Brian Blaesser, who heads up the real estate development practice at Boston-based law firm Robinson & Cole, agreed with Kiessling that requiring homeowners to pay taxes would be a tidy solution to the problem. But he cautioned against the spread of a practice he's observed where local authorities reclassify residential properties in the tax code.

"It's one thing to pay taxes," Blaesser said. "It's another when the local community itself is saying, 'We're going to reassess your property as commercial.' … If it's going to be a trend, that's a dangerous trend."

But Kalkut said that many people who use short-term rental sites own a spate of properties – and they aren't owner-occupants of any of them. He suggested that it might be time to rethink the strict commercial vs. residential paradigm in the face of a new hospitality environment.

"Would you say a bed and breakfast is residential use?" he asked. "The realities are changing, and a lot of this is new."

Blaesser, whose firm helps NAR and other groups analyze local ordinances related to the regulation of short-term rentals and other real estate issues, sees a "disturbing" trend where some state and local governments use new taxes and other rules to quash this growing industry.

"You are running up against a fundamental issue here about what government can do," Blaesser said. He warned real estate professionals to watch these restrictive trends closely. If they don't, "you're going to be pushed into a much more regulated environment."

Source: Meg White, Realtor Magazine

© 2016 Florida Realtors®. All rights reserved. Reprinted with permission.

1 reply
  1. Ron
    Ron says:

    They are a busniess. They are hotels providing sho

    Quick answer to your question is Yes! They are no different than any other busniess that pays taxes. What entitles them to such special treatment. Why are bed and breakfast treated differently?They are both transient dwellings operating daily rentals.

    It is time to reclassify these dwellings. They are transient occupancies and should have their certificate occupancy classification changed from permanent occupancy R3 to transient occupancy R1.

    When the owner of the realty engages in the business of supplying accommodations to lodgers, they are conducting a business different from letting property to tenants.

    The law distinguishes between the rights provided under a lease and those provided by a license.

    A lease is a contract by which a rightful possessor of real property conveys the right of use and occupy the property in exchange for consideration. A lessee or tenant is given full and exclusive legal possession of the premise and is responsible for it’s care and condition.

    A vacation rental by contrast a licensee or lodger has only the right to use the premise, subject to the landlord retention of control and right to access to them.

    When you rent for less than 30 days you’re essentially operating a hotel to that extent owners and operators of vacation rentals commonly provide maid service to keep the premise clean and compete with hotels. Occupants may also find gift baskets, food, or beverages awaiting for their short stay. In addition to advertising to tourist and other visitors providing them with fresh linens and towels, complimentary soap, shampoo,a hair dryer,an iron,wi-fi and map and information on local entertainment venues.

    These are services distinct from those offered in traditional rentals between landlord and tenant. Rather such rentals are more comparable to a hotel, the traditional and iconic symbol of a license agreement, where maid service and other amenities are provided.

    The proper classification of vacation rentals, therefore, a license agreement. The occupant is the licensee; the owner is licensor.

    Vacation rentals are more than mere license agreements. Like hotels, they are a busniess conducted with the purpose of making a profit.

    Federal and local governments regulations regarding this matter also holdout the activity as a busniess. These entities have thus clearly defined the activity as a business operation, and have distinguished between traditional lease and vacation rentals.

    The IRS distinguishes traditional rentals between landlord and tenant from vacation rentals between licensor and licensee. Form 1040 schedule E is required if the owner of real property rents a premise. This form redirects and requires those property owners who provide significant services to the renter such as maid service to report the rental activity on schedule C or C- EZ Not schedule E.

    Schedule C is entitled and provides for profit and loss from businesses. The IRS understands and makes the key distinction between the traditional landlord tenant relationship with a lease agreement and vacation rentals.

    Vacation rental income is classified as business income.

    Local governments for tax purposes have defined vacation rentals as hotels and require an additional tax that traditional landlord/ lessors are not required to pay. The tax is the transient occupancy tax. It is commonly known as bed tax.

    Thus, where property is used in hotel- like manner , such individuals for consideration stay for short periods of time, both Federal and local government entities have classified the use as a business. It is irrelevant whether the property is a large hotel or a three – bedroom two- bath house.

    Vacation rentals are grouped by lay people into category of ” rentals”, which include traditional landlord tenant lease agreements;,they are licenses. While the population of the US has popularized the term ” vacation rental” it is merely a common usage titled that lacks legal meaning.

    Legal community should not be grouping vacation rentals together with lease agreements.

    In addition vacation rentals are considered businesses in the eyes of the insurance companies. When you collect money to allow a guest to stay at your place for a short period of time this is a business transaction. Your vacation rental is no different than a coffee shop or grocery store, it’s a busniess.

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