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How Will the Proposed Nightly Rental Tax Impact Property Owners?

May 11, 2022 by in Commercial Real Estate

Managing short-term rentals can be complicated for several reasons, but tax requirements are often the most concerning. This is especially true when new tax proposals arise. You might be wondering about the nightly rental tax proposal aimed at short-term Colorado rental properties, and you’re not alone.

Let’s review the basics of the proposal and the impact it may have on rental property owners.

Current Tax Requirements

Typically, vacation rental tax rules depend on how often a property is inhabited by tenants. Owners do not have to pay taxes on the rental income they receive from properties that are only rented out for 14 days or less per year. However, owners cannot deduct any expenses incurred from this type of rental from their taxes.

If tenants inhabit a home for more than 15 days each year, the owner must record the rental income on their tax return. Expenses are deductible in this situation, but only to the extent of the income received.

The Basics of the Proposal

The proposed nightly rental tax seeks to tax vacation properties in Colorado the same way that hotels are taxed. The bill proposes that vacation properties rented nightly for more than 30 days each year become subject to commercial property tax rates of 29% during those days.

This means that if a vacation property is rented for less than 30 days each year, owners are not subject to commercial tax rates. However, if they rent their property for 35 days, all 35 of those days are subject to commercial rates (29%) rather than single-family residential rates (often 6.9%).

Colorado Property Investors

Property owners who allow the temporary rental of a personal residence or rental of a vacation property for less than two weeks out of every year will be largely unaffected by this particular bill (if it passes). It’s important to realize, though, that the rental housing climate is already changing when it comes to taxes.

Whether or not this proposal passes, the state will likely institute additional policies to manage how short-term rentals are taxed.

Impact on Property Values

Vacation rental tax changes are unlikely to affect most residential property values or the values of current commercial properties. The main impact will fall on homeowners and investors who specifically aim to rent out their properties for more than 30 days each year.

In summary, owners who do not currently pay vacation rental taxes due to only having tenants for 14 days or less each year should experience no changes in the way they’re taxed. Owners who rent their properties for 15-30 days each year will likely pay residential tax rates, and owners who rent for more than 30 days will pay commercial rates if the proposal becomes law.

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