A New Massachusetts Law for Short-Term Rentals Goes into Effect July 1st. If You’re a Host, Here’s What You Need to Know About This First-Of-Its-Kind Ruling.
Are you a New England homeowner taking advantage of the booming short-term rental market? If you rent out your vacation home or investment property to different guests throughout the year, you are not alone. Thousands of New Englanders are doing the same thing and are finding that a steady stream of income can develop from this venture.
The popular accommodation-sharing platform Airbnb reported that, in Massachusetts alone, its hosts earned a total of $256.4 million last year — up significantly from the $193 million they earned in 2017. Even better news for hosts like you is that 2019 is slated to be another banner year for the area’s short-term rental market.
Along with the exponential growth of this industry, though, has come increasing attention from state and local town and city regulators. As a matter of fact, all short-term rental hosts need to be aware that Massachusetts has now issued a short-term rental property law that will go into full effect on July 1, 2019 and imposes new taxes and regulations on property owners like you. Even more, hosts found in violation of this first-of-its-kind state law may be subject to heavy fines and other painful penalties — up to and including the permanent closure of their short-term rental operation.
Whether you’ve been home-sharing for years, have multiple properties that you rent out seasonally, or are just now considering dipping your proverbial toe in this short-term rental market, it’s critical that you take the time to understand these new rules.
At Fred C. Church, our top priority is to provide you with knowledgeable advice on how to protect all your important assets, including your short-term rental property. So, our team is here to share some of the most critical things you need to know about this recent Massachusetts ruling, which will:
- Establish new state, regional and local tax rates, that could range from 5.7% to over 15%, on most short-term rentals.
- Require short-term rental operators to obtain a certificate of registration from the state’s Department of Revenue.
- Impose stronger insurance requirements on hosts, including mandating that they have at minimum a $1 million liability insurance policy on each property they rent.
Wondering if these rules apply to your investment property? The law broadly defines any “short-term” rental as a unit or building where:
- At least one room or unit is rented
- Occupants make their reservations in advance
- Lease periods do not exceed 31 consecutive days
Even if you are a host that lives outside of Massachusetts, but operates a short-term rental property in the state, these new rules apply to you.
That doesn’t mean there aren’t any exceptions. In this case, though, most of the exempt properties that you’ll find in this new law are not the typical peer-to-peer rentals you’d find on Airbnb or HomeAway — for example, a convalescent home or a property that’s rented out on a month-to-month lease will not fall under these new requirements.
However, if your property is not one of the few exceptions, don’t worry you still have some time to prepare for these changes and the Fred C. Church team is here to assist you. Below, we’ve detailed out the three most important things we recommend you start doing right now so that you’re ready for the transition to these new rules this summer.
Step #1: Plan to register your short-term rental property with the state
Finding and maintaining a reliable short-term rental investment isn’t easy. After all that hard work researching the right property, decorating it just so, and writing the perfect pitch to your prospective guests — not to mention all the ways you’ve bent over backward to maintain a five-star rating with even the pickiest of lodgers — the last thing you’d want is to get shut down for forgetting to apply for a permit to operate.
So, here’s an important deadline to put in your calendar app – after July 1st, you won’t be able to host a short-term rental property without a certificate of registration from the Massachusetts Department of Revenue (DOR).
Right now, the Commonwealth is still hammering out the details of just how it will require hosts to apply. Until the DOR finalizes the permit application process, hosts in Massachusetts are free to continue their short-term rental operations as usual. However, we strongly encourage you to keep an eye on this Mass.gov page for more specific information about the registration process as it becomes available. If you were to fail to register by July 1st, you could be charged late fees, interest, and other financial penalties on the amount you owe, as well as face possible legal action. It could also impact your ability to operate a short-term rental property in the future.
Once you have registered your property with the DOR, your short-term rental operation will be listed in a publicly searchable database, along with all other similarly permitted properties in Massachusetts. Information that will be made public will include the street name and town of each registered unit.
The new Massachusetts short-term rental law also empowers municipal governments to create their own databases, which may include more specific information about your rental property. If your city or town creates its own licensing registry, you must file two individual registrations – one with the state and another with your local authorities.
Lawmakers hope that maintaining a public registry of short-term rental properties that are in good standing with state and local regulators will both help consumers identify legitimate rental options and discourage operators from tax evasion (see Step #2 below). So, while this new registration requirement might make for some extra legwork on your part, the intent behind it is to improve transparency in the short-term rental market, and thus should be a positive development for everyone involved in the industry.
Step #2: Start charging a tax on applicable guest rentals that begin on or after July 1
For years, homesharers in Massachusetts have been able to avoid any tax liability on their short-term rentals – even skirting the issue when Airbnb, itself, launched a public relations campaign asking lawmakers to apply the state’s 5.7% hotel tax to its listings. This measure failed in part because legislators on Beacon Hill couldn’t agree on the best way to go about it.
But lawmakers have finally struck a deal and are moving forward with a ruling that will expand the state hotel tax of 5.7% to include any short-term rental properties in the state. In addition, new rules will allow cities and towns that already have local lodging taxes on the books to extend those to short-term rental properties as well. To get a sense of what the potential tax impact might be for you and your rental, look for your community’s local hotel room tax rate with this tool on the Department of Revenue website, under “Rooms Tax Rate.”
Local governments have also been given the power to impose an extra “community impact fee” tax of up to 3% on “professionally-managed units.” These fees would apply to any short-term rental operator who runs two or more rental units in the same town unless those units are located in a one-, two-, or three-family home that includes their primary residence. Should a town enact such a tax, they’d be further empowered to rescind the two- or three-family home exemption as well.
Some communities have a community impact tax rate of 2.75% already written into the July 1st legislation, including towns in Cape Cod and its island communities, as well as a few large cities, like Worcester and Boston.
What does all of this tax jargon mean for you and your guests? Depending on what kind of short-term rental operation you run and where you run it, you are now going to have to charge your guests a tax on their stay ranging anywhere from about 5.7 percent, on the low end, to as high as nearly 18 percent. This tax must be applied to the full cost of the rent paid by your guests, including any fees charged for additional services, such as cleaning or booking fees.
If you use a hosting platform to share your rental property, you should check what tax support they might offer. However, it’s likely that you will be responsible for calculating, collecting, reporting and paying your taxes each month.
Operators should start applying these new taxes immediately, but only to stays on or after July 1st that were booked on or after January 1st. Here are a few examples of potential booking situations that might help to illustrate what stays you should be taxing and which ones you do not have to apply a tax to:
- You receive a reservation on January 2, 2019, for a stay on June 30, 2019. The new tax laws do not apply because the stay takes place before July 1, 2019.
- You receive a reservation on December 15, 2018, for July 2nd. The new taxes do not apply because the reservation was booked prior to January 1, 2019.
- You receive a reservation on January 16, 2019, for August 2, 2019. The new taxes do apply, because the reservation was made after January 1, 2019, and the stay takes place after July 1, 2019.
There are a few kinds of short-term rental properties that are exempt from these tax requirements, but that are still subject to the state’s new registration and insurance requirements (see Step #3 below). The exceptions are:
- Properties that are rented out on a short-term basis by members of the Armed Forces while deployed on official military business
- Rentals that go for less than $15 a night
- Properties rented out for less than 14 days a year
To qualify for a tax exemption, you must alert the Department of Revenue when you register for your operating license (see Step #1 above).
Beyond the tax implications of the new state law, there are other potential related costs that you should consider. The law authorizes local governments to establish a “reasonable fee” to cover any costs associated with enforcing local short-term rental regulations as well as civil penalties for violations of the new rules. Further, your town or city has the authority to place zoning restrictions on homesharing operations and even ban them outright.
While the Department of Revenue has yet to release the paperwork they’ll require for submitting your taxes each month, we highly recommend that you check back regularly on both the state’s short-term rentals and local tax FAQ pages. It also may be worth speaking with a tax professional in order to ensure you are fully meeting all of your obligations.
Step #3: Make sure you have at least $1 million in liability insurance on each of your short-term rental properties
While most homeowners know they must have the appropriate level of insurance protection for any property they own and hold a mortgage on, many find out the hard way – when they try to file a claim – that a standard home insurance policy is typically insufficient coverage for their short-term rental property.
The problem? Most home insurance policies include a “business pursuits” or “business activity” exclusion, which allows carriers to deny claims related to any business endeavors taking place on the premises. This means that, in most cases, if you experience property damage to your rental or its contents, or any guests are injured during their stay, standard homeowners insurance would not cover your losses.
Instead, short-term rentals generally require a specialized policy that provides comprehensive coverage for the building and its contents. It should also include financial protection against loss of business income and for liability claims arising from accidents that happen to renters or anyone else entering the home, like maintenance and housecleaners.
Even if you have an insurance solution in place that you believe was designed specifically for your rental property, now is the time to assess whether it is adequate to fulfill the state’s new insurance requirements. Based on the new short-term rental law, Massachusetts hosts need to ensure that they have at least $1 million in liability insurance coverage included in their policy for each property.
The state’s new law does recognize that the hosting platform you use may elect to provide some liability coverage for listed properties on behalf of owners. We want to caution you, though, that relying on your housing platform’s insurance policy is probably not the best way to manage the risks you have as a host, or even the optimal way to meet Massachusetts’ new liability requirements.
While platforms might be offering some form of insurance protection, it’s unlikely that they are providing you with the full coverage you need. For example, Airbnb’s Host Guarantee Insurance, which is extended to every host and listing on the platform, will cover you for any damages to your property, up to $1 million, but it won’t cover personal injury or property damage claims from third parties, the loss of cash/securities, or even damages caused by a pet.
At Fred C. Church, we understand how all of these changes to your normally turnkey short-term rental operation might be overwhelming as well as somewhat confusing. There is no doubt that there is a lot of new information to absorb and updates continue to come in daily. As we’ve pointed out, taking the following few initial and important preparatory first steps can save you a lot of time and stress when the Massachusetts short-term rental law ultimately comes into effect on July 1, 2019:
- Plan to register your short-term rental property with the state
- Start charging a tax on applicable guest rentals that begin on or after July 1st
- Consult with your insurance provider about the new $1million liability insurance policy requirement
In fact, during this time of significant change in the short-term rental industry, we are recommending that all of our clients who operate such properties come in for a meeting with a Fred C. Church insurance specialist. We will be happy to review whether you are meeting not only the liability insurance coverage requirements but also the other conditions of this new state law. In addition, we can offer our professional recommendations for how to keep your valuable asset secure for the long-term.
Contact Fred C. Church today for support in managing all the risks associated with your short-term rental property.