Tax And Non-Tax Issues of Sharing Residences

label graphic design , vector illustration

We hear a lot about the sharing economy – making money by sharing something you are not fully using, such as a room in your home, or your entire home or vacation home. Sounds like a good way to make some extra money and perhaps raise your standard of living* (note- the rental income is taxable unless the dwelling is rented out less than 15 days for the year (Section 280A(g)). The federal tax treatment (and state as most states follow the federal income tax rules) can be complicated due to the need to determine which of two rules apply to measure deductible expenses and what to do with any loss generated. If the average rental period is 7 days or less, treatment of any income and loss also depends on whether you materially participate.  The income tax rules easily get complex.

But what about non-tax aspects of short-term rentals? Local governments and residents are noting a variety of concerns, such as:

• It may crowd out the availability of long-term housing and raise prices.

• It may cause increased fire and police protection needs (for example, does that house renter know how to get out of the neighborhood in case of an emergency or even have a car)?

• If there is rent control, might a tenant be generating more rent than the owner is allowed to charge?

• Does the rental violate local laws on zoning, residential rentals, number of people in a property, etc.?

• It can change communities to have more renters and fewer long-term residents (the “whereas” clauses in the Santa Monica ordinance stress this).

• For tenants, are they even allowed to rent out their leased property? Similarly, many homeowner associations don’t allow certain rentals.

Some cities have already changed laws to either allow short-term rentals or to place restrictions on them. For example, the City of Santa Monica enacted Ordinance No. 2484 in May 2015 to remind property owners that vacation rentals were never allowed. The ordinance allows home-sharing (where the owner or resident is present throughout the visitor’s rental period).  There is also a reminder about the need to register for a business license and pay the transient occupancy tax (hotel tax), although the host platform (Airbnb, for example) is allowed to collect it for the property owners (a good, easy arrangement for the homeowner and the city).

The City and County of San Francisco had allowed short-term rentals, but is reconsidering. It looks like the main concern is the crowding out of long-term housing.  The ease of renting property and making lots of money via Airbnb or similar web platform has led some people to either buy a property solely for the purpose of using it for short-term rentals, or to convert their property to full-time short-term rentals. One way to limit that activity is to place a limit on how many days during the year a property may be rented out for short-term use.  For example, one of the proposals to be considered by the SF Board of Supervisors at its upcoming July 14 meeting calls for the following:

“to limit short-term rental of a residential unit to no more than 60 days per calendar year; require hosting platforms to verify that a residential unit is on the City Registry prior to listing, remove a listing once a residential unit has been rented for tourist or transient use for more than 60 days in a calendar year, and provide certain usage data to the Planning Department. …” (150295 – see link on the 7/14/15 agenda)

Another proposal on the 7/14 agenda is similar only limits rentals to no more than 120 days per year. (150363 – see link on the 7/14/15 agenda)

There is likely to be a ballot initiative in SF this year on the topic as well. If signatures are approved, it will limit hosted and unhosted rentals to 75 days per year total. Hosting platforms would be required to not list a property once the limit is reached for the year.  The required registration with the city must include, for tenants, whether the property owner allows the tenant to sublet. The city would be required to post the approval notice on the property and alert owners and neighbors.  [See summary here,and status of this initiative on short-term rentals here.]

Tax relevance? Well besides some complications in the federal and state income tax laws for the property owners, there is tax relevance for most cities. Many cities have a hotel tax, usually called a transient occupancy tax (TOT) that usually applies for any rentals of 30 days or less.  These taxes can be high. For example, 14% in SF, 15% in Anaheim (home of Disneyland), 4.5% in Chicago, and 6% in Houston. Prior to web platforms, such as Airbnb, it would be difficult to rent out your spare room for short periods so you’d seek a long-term tenant and the city would get no TOT. So, cities should be getting more TOT today.  Also, renters need to see if they might also owe sales tax, tourist taxes and other special taxes (check the city’s website). Flagstaff, has a 2% BBB tax (bed, board and beverage); apparently instead of a TOT.

But, there are other issues to consider as noted above. Also, cities likely need to hire a few more employees to handle administration including enforcement. Also, they should aim to be sure the TOT is simple to comply with. Finally, cities should consider changing their law to require the web platform to collect. It appears, that Airbnb wants cities to do this. That makes good business sense for them – it is likely easy for Airbnb to collect the tax as it already has the information on the rental rate and period. (See 2/13/15 article in Slate magazine, and Airbnb website about locations where it handles the TOT compliance.)

I plan to post more later on the rules about the federal income tax rules on rentals (I co-authored an article on this topic, with a helpful flowchart, back in 1990(!); it needs minimal updating).

*Airbnb issued a report in June 2015 on who rents out their residences in five cities, average age and income and the impact to their income – here.

What do you think about the economic benefits to homeowners and cities? Regulating short-term rentals, and anything else about this multi-faceted topic?

Original Post By:  Annette Nellen


Annette Nellen, CPA, Esq., is a professor in and director of San Jose State University’s graduate tax program (MST), teaching courses in tax research, accounting methods, property transactions, state taxation, employment tax, ethics, tax policy, tax reform, and high technology tax issues.

Annette is the immediate past chair of the AICPA Individual Taxation Technical Resource Panel and a current member of the Executive Committee of the Tax Section of the California Bar. Annette is a regular contributor to the AICPA Tax Insider and Corporate Taxation Insider e-newsletters. She is the author of BNA Portfolio #533, Amortization of Intangibles.

Annette has testified before the House Ways & Means Committee, Senate Finance Committee, California Assembly Revenue & Taxation Committee, and tax reform commissions and committees on various aspects of federal and state tax reform.

Prior to joining SJSU, Annette was with Ernst & Young and the IRS.

Twitter LinkedIn 

Leave a Reply

Your email address will not be published. Required fields are marked *

4 × five =