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5 Legal and Regulatory Considerations for Short-Term Rentals

5 Legal and Regulatory Considerations for Short-Term Rentals

Short-term rental business opportunities such as Airbnb, HomeAway and VRBO are a great way for homeowners to earn money. Whether you’re looking to subsidize your income or defray the costs of owning a second home or vacation property, it’s a hot market. According to Research and Markets, the global vacation rental market will register a Compound Annual Growth Rate (CAGR) of close to 7% (an incremental growth of an estimated $57.1 billion) by 2022.

But as short-term rentals have grown beyond a cottage industry, regulators are starting to play catch-up. Spurred by complaints from neighboring residents and the traditional hotel industry, cities have enacted laws to regulate short-term rentals across the nation. The fines for non-compliance can be substantial. In Miami Beach, FL, fines for a first violation start at $20,000.

With such costly and ever-evolving regulatory dynamics, it’s important that property owners understand the legal considerations for short-term rentals. Below are the answers to five commonly asked questions about the laws and regulations that govern short-term rental businesses.

1. What’s the Definition of a Short-Term Rental?

Sounds straightforward, right? You rent a room or your entire property to a guest for a short period of time. However, it’s not quite that simple. The definition of a short-term rental can vary based on several key factors:

  • Type of Structure: Each city or county has varying definitions of what constitutes a “short-term rental property”. In Charleston, SC, if the residential property is outside the historic district, it must be over 50 years old. There are even more restrictions imposed on houses that are in the historic district. Whole-house rentals are not allowed.

    Head on over to the Rockies where in Denver, CO, and you’ll come across a different set of rules for what’s considered a short-term rental: the property must still clearly look and feel like a residence in which someone lives; and mobile homes, RVs or travel trailers cannot serve as short-term rentals.

    The definition is important because it doesn’t just impact how you rent out your space, but also the types of licenses and permits you need and other laws that may apply. Check with your city or county website to find out more.
     
  • Length of Stay: How long you open your property to renters is also key in defining it as a short-term rental or not. In many cities, including Denver and Charleston, the length of stay is limited to less than 30 days. Los Angeles recently approved to limit the number of days to 120 a year—although exceptions can be made to those who qualify. Manhattan Beach, CA, is considering lifting its ban on short-term rentals but is looking to restrict the number of days to at least seven.
     
  • Residency: Some cities also require that the property have a primary resident in order to prevent investors who don't live on the property from renting out a unit or entire property as a short-term rental.

2. What Are the Legal Restrictions for Short-Term Rentals?

In addition to regulating the type of structure and length of stay, there are several other legal restrictions to which short-stay rental businesses are subject. Again, these vary by city, county and state.

Here are just some of the common restrictions:

  • Prohibition of Short-Term Rental: Some cities completely prohibit short-term rentals. In California, the City of Santa Barbara defines short-term rentals as “hotels” that can only operate in designated zones and then only if all necessary approvals are obtained. In San Diego, short-term rentals are prohibited in any zone. 
     
  • Limits to the Number of Rental Properties in a Location: Large cities and tourist destinations tend to have strict rules, such as placing limits on the number of short-term rentals in any given zone. For example, New Orleans, bans short-term rentals in the French Quarter, except for certain areas. The city even has the cooperation of Airbnb and city enforcement officers to track down violations and complaints. 
     
  • Multiple Dwelling Laws: New York City has some of the toughest restrictions on short-term lets. To prevent disruption to residents and help prop up its hotel industry, New York’s 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) if a permanent resident is present. Penalty for the first violation is $1,000; $5,000 for the second; $7,500 for the third and subsequent violations. It is also illegal to advertise a rental that is prohibited by the MDL.

Be sure to check the laws in your city or state, which are subject to change. If you intend to rent condo or co-op space, consult your association rules to see if anything limits your ability to rent space as well as HOA bylaws or timeshare ownership rules. If you rent your property from a landlord, be sure to get their okay too.

3. What Licenses and Permits are Required?

Here’s a checklist of what licenses or permits you may need to obtain:

  • A General Business License: If you’re operating any sort of a business, including renting property, your city or county will likely require you to obtain a license or permit. 
     
  • Short-Term Rental License: You may also need a short-term rental license or permit. Applications typically require you to attest that the property meets health and safety requirements (such as smoke detectors and fire extinguishers), is up to code, compliant with zoning laws and that adjoining properties have been notified. Proof may also be required that the unit being rented is your primary or secondary residence.

Check your local government website for details or refer to the “Getting Started” information through your online rental company (Airbnb, VRBO, etc.) for license and permit requirements in your area.

4. What About Zoning Rules?

We’ve mentioned zoning laws already. Don’t skip this important step in your business planning. If your property is not zoned for short-term rentals, your options are very limited. Don’t take the risk. All it takes is a complaint from a disgruntled neighbor to trigger a cease and desist notice from the zoning department.

5. How to Pay Taxes on Short-Term Rentals

Taxes are a critical part of regulatory compliance. In addition to paying income tax and self-employment taxes, some local governments impose a short-term rental occupancy tax (lodging or hotel tax). It’s a good idea to consult your tax advisor to see which tax deductions you can claim. For example, the IRS lets you claim rental expenses for property and rooms rented (such as rental fees charged by short-term rental companies) if you meet certain criteria. It's important to keep thorough records of all rental periods and any expenses incurred throughout the year.

Conclusion

The laws and regulations that govern the short-term rental market are constantly changing. As demand remains high, more and more cities and vacation destinations will continue to take steps to protect residential neighborhoods and guests alike.

For now, check your city’s ordinances and state laws before getting started and revisit them often as regulations can change at any time.

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