Taxes and Insurance and Inspections, Oh My! Considering Actual Costs of Airbnb and other Short-Term Rental Income

Posted in on March 12, 2019

According to Airbnb, hosts in Massachusetts earned over $256 million from 1.2 million renters. The growth of private vacation rentals deriving from Airbnb, HomeAway, VRBO, and similar websites has provided extra income for property owners in Massachusetts and additional options for travelers to the state. The tremendous growth, however, has also prompted state and local regulations that grant a piece of the pie to the government and establish safety measures.

Some towns and cities have already regulated the industry, but all vacation rentals in Massachusetts are affected by a new state-wide law that becomes effective July 1, 2019. The law is codified in sections of G.L. c. 64G. This state law, local regulations, and liability risks create additional costs for short-term vacation rentals that the average owner-host may not be anticipating.

First, the new law mandating excise taxes applies broadly. It applies to properties that are rented out as a whole and to single room rentals within a property for a consecutive period of 31 days or less. It is not limited to vacation rental taxes but includes business and other type of short-term rentals. Hosts can include the property owner, tenant, or licensee – whoever is actually renting the property to a short-term renter. All hosts who rent property for short-term rentals more than 14 days per year must pay a state-wide lodging tax of 5.7% and, if applicable, an additional municipality tax. Not all municipalities have a local rooms tax, but many do. For example, the local room tax in Quincy and Braintree is 6%. Additional fees are applicable in cities like Boston or in certain Cape towns.

Second, all hosts are required to register with the Department of Revenue using MassTaxConnect. Hosts that rent 14 days or less per year do not need to pay the taxes, but they still need to register and declare that they are entitled to the excise tax exemption.

Third, cities and towns can adopt additional regulations and many have done so. These regulations can require registration with the municipality, inspections, fees, and penalties for noncompliance. The regulations also authorize publication of a list of all registered short-term rentals. Hosts should always check with the municipality to confirm whether they are complying with location regulations.

Fourth, there are other considerations beyond the excise taxes and local regulations. State and federal income taxes apply to short-term rentals and other sources of income. Additional governmental fees may apply if a host engages a professional management company to assist with the short-term rentals.

Fifth, hosts are required to maintain $1 million dollars in liability insurance to cover each short-term rental. If the hosting website does not provide this coverage, the host is still responsible. Traditional homeowners’ policies may not cover liability from short-term rentals. This additional use should be discussed with an insurance agent. The rentals may still make sense after deducting the fees, taxes, and expenses. An injury that is not covered by insurance, however, could be devastating.

The short-term rental market can be lucrative and convenient, but hosts need to understand the actual costs for embarking on or continuing this venture. If you have questions on short-term rentals or other uses of property, please contact one of the Real Estate attorneys at Baker, Braverman & Barbadoro, P.C. to get the expert legal advice you need. – Kimberly Kroha.