Keeping it Legal: The Laws & Taxes For Short-Term Rentals

Posted on November 3, 2017

Note: This blog post focuses on entire apartments or houses as far as short-term rentals are concerned. Different regulations may apply for sharing only part of a home, especially if the host lives there as a primary residence.

Short-term rentals have been a business for decades. From local realtors to small management companies to your local tourist office – getting paid to run short term rentals (AKA vacation homes) is not a new concept.

But recently platforms like HomeAway and Airbnb have decentralized the short-term rentals process. Which is bringing more individual players and new completion into the market.

Traditional hotels are beginning to realize how the new short-term rentals market is a threat to their industry. Many are complaining about the unfair advantage short-term rentals have over their establishment.

Hotels have been around for hundreds of years. Like any other "old" industry, they're subject to many rules and regulations. Some of them apply to hotels only, but many actually include short-term rentals – or are about to be change to include them.

Here's 3 things you need to consider as a short-term rentals home owner or manager:

  • Laws (as in limits for what you can and can't do)
  • Permits
  • Taxes

Let's start off with the laws.

Laws Applying To Short-Term Rentals

A few years ago seeing any kind of limitation on short-term rentals was rare. But the recent growth of listings in larger cities has triggered a whole set of new regulations.

For example in Berlin new limits on short term rentals slashed the apartments available for rent from 11,000 to just 6,700 in a few weeks.

And even though the decision was legally challenged and ultimately overthrown, there is still a hard limit of 182 days per year for any given property.

In Barcelona, where almost 50% of short-term rentals continue to operate without a license, Airbnb had to pay a fine €600,000 last year. Then there's also the “illegal apartment squads” which are cracking down on any operator without a permit.

In New York it’s been illegal to rent out a whole apartment for less than 30 days since 2010 – causing Airbnb to spend millions in legal fees to support their 16,000+ hosts in the city. In San Francisco, (the birth place of Airbnb) you’re limited to renting 90 days a year.

And that's only after applying for a permit, getting insurance and spending 75% of the time (275 days) at the place yourself.

Outside of major cities and tourist hubs, rules as strict as these as still rare. As a rule of thumb: Wherever there is a housing shortage or tourists flock in the millions, there’s likely to be limitations in place. Check with your local government to stay on the safe side and avoid paying a fine.

Next is the permits.

Permits For Short-Term Rentals

Most if not all places with laws in place as mentioned above require a permit to run short-term rentals. But even locations with no limits for duration or use may require you to register your property and get a permit.

In Sonoma County, home to many of California’s best wineries, you need to apply for a vacation rental permit and be a certified vacation property manager to legally run short-term rentals.

Then there's Palm Springs, a city notoriously famous for 350 days of sunshine and lavish pool parties. All owners and managers of short-term rentals have to apply for a Vacation Rental Registration Certificate – which will cost you $900 per year.

The "good news" is most short-term rental platforms don’t check or control any permits unless there are laws requiring them to do so, such as in San Francisco.

But you should still apply for the correct permits. If you get caught without them not only would you be breaking the law and risk getting fined up to $20,000, but you could also be liable if something happens. (Slip and fall, etc.)

Finally we get to taxes.

Taxes On Short-Term Rentals

Assuming there are no legal limitations and you don't need to get a permit, you might still need to pay taxes (apart from declaring your income on your personal income taxes, which you’re hopefully doing already).

The tax in question is usually called Transient Occupancy Tax, or TOT for short. It applies to any income generated from stays 30 days or less. Hotels have had to pay this tax for years.

There is no rule of thumb for TOT. Some counties and towns have it. Many still don’t. Your town might have it for hotels (most likely), but not yet for short-term rentals.

Rates go from as low as 6% in Calaveras County to as high as 14% in Palo Alto, with most places landing somewhere in between. Some offices allow for online remittance. Some want it on paper. (Yes – still.)

The tricky thing about TOT is collecting and declaring it. While Airbnb has taken big steps by collecting and remitting it automatically for some places, most of the time you will have to manually deduct the tax amount from the price per night.

And why you ask? Because there is no manual tax setting on Airbnb listings.

As for HomeAway, TripAdvisor and booking.com, they all have manual tax settings per listing, which makes collecting easier. But let’s say you list in Sonoma County, where Airbnb collects and remits, but none of the others do.

In a situation like that you’ll have to manually sort out Airbnb bookings and only declare the rest. Knowing things like this makes me feel glad that I co-founded GoNitely.

Either Keep it Legal or be Ready to Pay Fines

I recommend you check on all 3 (laws, permits & taxes) before you start renting any kind of entire property. Differences are big within a small radius. For example, San Francisco has all 3, whereas Pacifica (15 miles down the coast) doesn't have any.

Be sure to do your homework, being wrong can be expensive.

Or you could get someone to do it all for you. (Hint: GoNitely does.)

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About the Author:

Picture of Markus
Proud father and husband, humble leader. Currently revolutionizing short-term rental management with GoNitely. Living in beautiful California close to San Francisco.

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