Short Term Rentals - A Boom to Landlords or a Legal Tangle?

By Doug Owens

One of the benefits of being a member of the state bar association is that I can receive information generated by colleagues on topics that are of interest to REAPS members. One of my colleagues wrote an article recently on short-term rentals and some legal issues these rentals present that are not present in more typical residential rental situations and after investigating I decided to pass on some of these points to you as well as some others I have found.

There are several tax implications of operating the residential property as a short-term rental. First is the state and potentially local sales tax. The cutoff line for when revenue from residential property rental is subject to sales tax is thirty days. If the stay is for less than thirty days, then the revenue is subject to sales tax. If the stay is for more than thirty days, then sales tax does not apply but the state business and occupation tax does apply. If The landlord rents to transient tenants three or more times in a year, then the landlord must register with the Department of Revenue and collect sales and lodging tax on these rental transactions.

Another tax question related to short-term rentals is whether any of the revenue is generated by the provision of services to the renters such as meals or maid service, that are not ordinarily provided to occupants of the residential rental property. If these services are provided, for example in a bed and breakfast type of short-term rental, then the income is subject to self-employment tax.

The next area of concern is regulations that apply to short-term rentals. Under the law in Washington, if a landlord operates three or more rooms for short-term rentals, that is technically in the same category as a hotel. Such an operation must obtain a license from the Department of Health and undergo an inspection. There are regulations that prescribe the type of food cooking equipment and refrigeration and the number of chairs in the eating area for such short-term rental rooms. However there is an exemption: if space only offers a microwave and mini refrigerator, it is not subject to the more onerous requirements but still is required to be inspected and pay an annual license fee. This requirement can apply if the owner of a single-family home rents out three rooms in that home as separate units for short-term occupancy.

The thirty-day cutoff referred to above for taxation also triggers the exemption from the Residential Landlord Tenant Act for hotel accommodations. If Your tenant stays longer than thirty days, you will not have the benefit of that exemption. Otherwise, you do not have to comply with the requirements of the law for tenants. Also operating a short-term stay rental is a business that is likely subject to the Consumer Protection Act.

If the property involved is a condominium the prospective landlord should carefully review the declaration and covenants to determine whether there are any restrictions there against short-term rentals. Many condominium documents do restrict short-term rentals and it is important before embarking on this type of business in a condominium to ensure that there are no applicable restrictions.

Insurance is another aspect of this business that should be reviewed carefully. It is typical in longer-term residential rentals for the landlord to require the tenants to obtain renter's insurance. This is not usually practical in the short term rental context and it may be the case that the landlord's insurance does not adequately cover losses that might be generated in such a tenancy.

There are also local political concerns about the short-term rental business. There have been instances in the Greater Seattle area of neighborhood associations objecting to bed and breakfast operations because of the impact on street parking and tenants' organizations proposing legislation to restrict the number of short-term rentals that can be generated by converting longer term to short-term rentals.

The preceding is intended to be educational and should not be considered legal advice.

About the author ...

Doug Owens practices real estate law and general business law from his office in Anacortes. He offers a 20% discount for REAPS members and he can be reached at (360) 299-2990 or dou,[email protected]

REAPS is the oldest – and largest - Professional Association for the real estate investor this side of the Mississippi. We provide education and networking resources for real estate investors, those who want to be investors and anyone who provides value to our members. Our goals are to motivate and support our members and guests through education, discussion, legislative action and networking. We host over 40 live events a year around Puget Sound and they are all open to the public. If you've never attended one of our meetings, just email our office at [email protected] and be our guest for free!"

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