iGMS | Essential Vacation Rental Rules and Regulations

 As short-term rentals continue to rise in popularity, our friends at iGMS have written an excellent blog about the legal aspects to pay attention to when owning a vacation rental property. To read the original article, please visit iGMS.com. This article has been edited for length.

With the demand for vacation rentals increasing, so too have the vacation rental rules and regulations. Considering that these days it is a recognized and very popular industry, it makes sense that there should be some set of rules to protect the professional image of the vacation rental industry, after all. 

That being said, in many instances, objections from the broader community have meant that the regulations that cities impose are quite strict. What’s more, failure to adhere to these rules can result in a hefty fine or other legal repercussions. So, it is best that property owners familiarize themselves with the legal aspects before listing a vacation home. 

What defines a vacation rental? 

Vacation rental (short-term rental) term explained:

A vacation rental property is a property that is rented out on a short-term basis (fewer than 28 days) to tourists and travelers as an alternative to a hotel. The duration for which you rent out your property is not the only factor that is considered when classifying a short-term rental. Depending on the location of your property, the definition of a vacation or short-term rental can vary. 

For example, in the US, the IRS views a property as a vacation rental if you rent it out for more than 14 days during the year (referred to as the 14-day rule). If you rent it out for 14 days or fewer during the year, it is viewed as a personal residence. In this case, you do not have to report your rental income. 

Traditional renting term explained:

If you choose to follow the traditional renting approach instead, you will rent out your property for a period of 6 months or longer. Not only does the duration differ, but also the rules and regulations. You will also be taxed on your long-term rental income, but there will be more concessions. For example, you will be able to deduct more expenses relating to your property. 

What licenses and permits are required for short-term rentals?

Keep in mind that the required permits that are needed for launching a short-term rental business can vary depending on the location of the property. Also, some licenses will have an expiration date and will need to be renewed after a specific period of time. So, it is best first to reach out to the city planning and zoning department before applying for your license. If you need to obtain a license, it will typically be the following: 

General business license

Many countries and cities require that hosts have a business license if they plan on listing a rental property on Airbnb or other similar platforms. The property’s physical address will dictate to which jurisdiction you should apply. However, it is not always as straightforward. Sometimes a property can be located in an unincorporated area. In this case, you might have to get more than one business license. Whichever the case, as an aspiring rental owner, before you start operating your business, make sure to check the website of the local government or jurisdiction for more information about the business licensing process and links to relevant forms.

Short-term rental license

Considering that many countries have some form of legal restriction, the chances that you will need a short-term license are high. This helps the local authorities to ensure that all the health and safety requirements relating to the property are met. 

For example, in the US, several states may call for a property inspection before giving a license. If this is the case, you will need to get a certified building inspector first to assess if the structure of the dwelling unit is correct and the local safety requirements are met. The website of your local government will have all the requirements regarding short-term rental license and permit requirements. 

What laws and regulations should be considered before I start hosting? 

Not only can licenses and permits derail your plans, but also the local rules and regulations. Most government websites include information on how to comply with local and state ordinances, such as tax instructions, health and safety standards, and licenses/permits. So, before you start hosting, you should also remember to check these online resources for the following: 

1. Building and housing standards

The majority of local governments and jurisdictions will have rules and regulations that outline the minimum design and construction requirements for buildings. It will also set out the minimum maintenance standards, such as rules regarding health and safety. 

2. Zoning laws and regulations

The city or specific neighborhood might have certain zoning laws and regulations that will apply to the property. These zoning rules will explain how you may use your property. The objective of these laws and regulations is to limit the number of vacation rentals in a specific area. Not only does it make it difficult for vacation rental businesses to thrive when there are too many rentals in an area, but it can also cause issues with noise levels, trash collection, and parking. To find out if your property meets the current zoning regulations, you can refer to the zoning code, planning code, city ordinances, or simply contact your local government directly. 

3. HOA rules

If you are renting out a unit in a condo or apartment block instead of a freestanding house, there might be general rules that you need to keep into consideration. These can, for example, include rules about quiet hours, smoking, parking, and pets. 

4. Landlord-tenant Laws

If you plan on hosting long-term stays, you might have to adhere to landlord-tenant laws. These laws differ from one jurisdiction to the next. Usually, these laws can mean more burdensome legal responsibilities for hosts. What’s more, it can also offer guests certain extra legal rights. Depending on the jurisdiction, these rights could include rights as a tenant. In this case, you will have to follow the official eviction process if you want to remove them from your property. A local lawyer who concentrates on landlord-tenant laws will be able to offer you more guidance. 

5. Taxes

There are several jurisdictions that ask hosts to collect tax for overnight stays. This tax will then be paid to the city or other jurisdiction. If you list on Airbnb, the platform might automatically collect and pay these taxes on your behalf, depending on your location. So, it is best to reach out to your local government beforehand to find out if there is any tax that you need to collect from guests. 

What short-term rental restrictions can I face as a vacation rental business owner? 

While the laws that govern short-term rentals continuously change, the following are some factors that hosts and property owners should keep in mind. To ensure that you operate within the law and avoid fines, you should refer to the laws and regulations of your specific location regularly and keep up to speed with the latest industry-related news.  

1. Short-term rentals may be banned in certain areas and cities 

In certain cities and areas, Airbnbs are prohibited altogether. The following are examples of cities that currently prohibit short-term rentals or impose very strict restrictions:

Los Angeles

In Los Angeles, hosts may only have guests for no more than 120 days per calendar year. When you reach this limit, you may not accept any new short-term bookings for the rest of the calendar year. Plus, if you do not have the necessary permit number, you will be prevented from hosting stays shorter than 30 nights at a time altogether. 

New York

New York has very strict policies in place regarding short-term renting. Currently, it is illegal to rent out an entire apartment in the Big Apple if the property owner is not present at the property.

Jersey City

For detailed information about the rental regulations regarding short-term rentals in Jersey City, you can refer to Chapter 255 of the Jersey City Code of Ordinance. In short, what you need to know is that short-term rentals operated by tenants are prohibited as well as short-term rentals in rent-controlled units. However, property owners may share their main residence for up to 60 nights as long as they are on-site and in possession of a permit. 

2. Limit on the number of vacation rental properties in your location

With regards to the number of short-term rentals that may be managed in a specific part of a city, important tourist destinations and large cities, most of the time, have strict rules. This is done to prevent a housing crisis in a specific location and avoid issues with noise levels, trash collection, etc.

3. Dwelling laws

Some cities might also have multiple dwelling laws. These laws help prevent rent costs for local residents from increasing. For example, in New York, only rentals of fewer than 30 days in a building that houses more than three families are allowed, and that is on condition that the permanent resident is present. 

What taxes do I need to pay when running a vacation rental business? 

As mentioned earlier, in the US, if you rent out your property for more than 14 days during the year, you will need to declare your income and pay tax. The good news is that there are, in most instances, several expenses that you can deduct from your income to lower the tax owed. So, it is crucial that you keep evidence of all the expenses related to running your vacation rental business, such as insurance, cleaning, and repairs.  

The following are some of the types of taxes vacation rental owners might need to pay: 

1. Lodging (occupancy) tax

Similarly to hotels, short-term rentals also need to pay lodging tax (also called short-term rental tax). Some vacation rental platforms might automatically charge guests this occupancy tax. If the platform does not collect this on your behalf or you take direct bookings via your business website, the onus will rest on you, the host, to collect the right percentage of occupancy tax. To calculate how much occupancy tax the guest needs to pay, you can refer to the website of your local government. 

2. Self-employment tax

In the United States, the IRS may view you as self-employed if you rent out your property. If this is the case, you will also have to pay self-employment tax. This contribution will go toward Social Security and Medicare. 

3. Income tax

Hosts need to pay tax on their income earned from short-term renting (if a host had rented out their property for more than 14 days in a year). Rental income is considered as any payment that a host receives for renting out a property. This can include unreturned security deposits, income for cancelations, or other fees that a host charges. The good news is that you can also deduct some expenses related to short-term renting. 

4. VAT

Depending on your location, you might also have to collect value-added tax (VAT) from your guests. To find out if you need to pay VAT, make sure to speak to a tax advisor familiar with your local jurisdiction who will be able to help you with assessing VAT on the services that you offer to your guests. 

To learn more about protecting your short-term rental business through CBIZ Vacation Rental Insurance, request a free quote today!

This blog may contain scenarios that are provided as examples only. Coverage is subject to the terms, conditions and exclusions of the policy issued. The information provided is general in nature and may be affected by changes in law or the interpretation of such laws. The reader is advised to contact a professional prior to taking any action based upon this information.

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