Learn about how short-term rental businesses are quickly expanding and how to form and create them, including business licenses and permits, zoning, taxes, & more.
Renting your home or an area of your home (bedroom or wing) is a great way to make extra money or mitigate the costs of owning a second home or vacation property. As such, it has become a popular and growing market, expected to reach $169.7 billion by 2019.
These short-term rentals can be great for homeowners and renters alike. But there are plenty of naysayers. Neighboring residents and players in the traditional hotel industry have pushed back, and many cities and towns are playing catch-up. In some cases, there are also fines in place for those who choose not to comply—and those fees are more than a slap on the wrist. The city of Miami Beach, FL, for example, issued fines totaling $1.59 million from March through August of 2017. Their fine for a first violation starts at a whopping $20,000.
These hefty costs and evolving regulations mean that it’s important that you understand the legal implications and considerations for your own short-term rental. Here’s what you need to know to make that extra money and avoid fees for non-compliance.
1. Know your short-term rental type
While the idea of a short-term rental may seem straightforward, in actuality, it’s a little more complicated. Your short-term rental can usually be defined by two categories: type of structure and length of stay.
The Type of Structure: What is a short-term rental? This varies from state to state. In Vermont, a short-term rental property is defined as “a furnished home, condominium, or other dwelling rented to the transient, traveling, or vacationing public.”
In Chicago, Illinois, that definition changes slightly to “a dwelling unit that contains 6 or fewer sleeping rooms that are available for rent or for hire for transient occupancy by guests.”
While confusing, this detail is important because it impacts how you rent out your space, along with the licenses and permits you need.
Length of Stay: How long, and in some cases, how often, you rent your property is also a crucial part of defining your short-term rental and the regulations that govern it. Florida specifies that a short-term vacation rental is “a property that is rented more than three times a year for less than 30 days at a time”.
Yet, in Seattle, Washington, they simply define length of stay as “a home, or part of a home, [that] is rented for a fee for fewer than 30 consecutive nights”.
2. Legal restrictions vary from state to state
Legal restrictions (which vary from state to state) are also put in place to control how many rentals there are in one region. In some cases, this is also done to help the other lodging businesses (such as hotels and B&Bs) in the area. Here are a few common stipulations and limitations:
- Prohibition of Short-Term Rental: There are some cities that have completely prohibited any short-term rentals, like the City of Santa Barbara. Here, short-term rentals are defined as “hotels” that can only operate in designated zones.
- Limits to the Number of Rental Properties in a Location: Large cities and tourist destinations often have strict rules, placing limits on the number of short-term rentals in any given zone. In New Orleans, only certain short-term rentals are permitted for certain areas. The city distinguishes “types of rentals” by accessory, temporary and commercial, and your licensing and permitting depends on the type of rental you have and where it is, all of which is detailed in their zoning ordinance chart.
- Multiple Dwelling Laws: New York City has some of the toughest restrictions on short-term rentals, in an attempt to reduce disruption to current residents while helping boost its hotel industry. Specifically, their Multiple Dwelling Law (MDL) only permits rentals of less than 30 days in “Class A” multiple dwellings (buildings with three or more families living independently)—but only if a permanent resident is present. Violations can cost up to $2,500 a day for renting illegally and it is also illegal to advertise a rental that is prohibited by the MDL.
These laws and regulations change regularly. If you’re renting, check the laws in the city or state where you intend to rent, first and foremost. Don’t forget to check with association rules if you want to rent a condo or co-op space, and check with all HOA bylaws or timeshare ownership rules as well.
3. Get your license or permit
A license or permit lets the state know that you are using the property as a short-term rental and that your home is up to code and complies with certain health and safety regulations. Here are two common licenses you might need to obtain before renting:
- General Business License: This is required of any business owner, including you as a short-term rental owner, in most states.
- Short-Term Rental License: In the application process, you will most likely need to specify that the home not only meets healthy and safety standards—think fire extinguishers, smoke detectors, and carbon monoxide detectors—but that it’s also up to code. You’ll also need to show whether you’re following proper zoning laws and that your adjacent neighbors know you’re renting.
To find out the requirements, you can search for information on local and state websites or speak with a legal services provider.
4. Know your zoning requirements
Bottom line, if your property is not zoned for short-term rentals, you don’t have many options to pursue this with your current property. Remember, just one complaint could lead to legal action from your local government, and potential fines.
5. Get your taxes in order
As a short-term rental owner, you may be subject to new taxes—specifically, short-term rental occupancy tax, which acts as a lodging and hotel tax. This is to be paid in addition to your usual income and self-employment taxes. Start by working with an accountant or tax professional to figure out what you can claim and deduct. That way you can keep track of all expenses properly throughout the year. The service provider or consultant can also help you determine whether you need a separate bank account, credit card, and so on for your rental business. In some cases, it’s wise to do so. In others, it may not be necessary.
Are you ready to be a short-term rental owner?
The short-term rental industry is growing fast, and cities and local governments are working to have regulations in place to keep rental owners and residents happy and safe. If you’re interested in becoming a short-term rental owner, start by checking with city and state ordinances and laws. Be sure to check back periodically to make sure you are still complying with the requirements for short-term rentals.
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