THE INEQUITABLE REAL PROPERTY TAX TREATMENT OF SHORT-TERM RENTAL PROPERTIES
Short-term rentals (“STR”) are a burgeoning and booming billion-dollar industry that remains largely unregulated and undertaxed. Earning two to three times the potential income of long-term rentals, STR investors enjoy freedom from the same levels of taxation and regulation that hotel and motel owners are subjected to. This occurred while the popularity of STRs skyrocketed during and after the Covid-19 pandemic with a concomitant decline in the hotel/motel industry. This allows short-term rentals, an unfair advantage over the traditional hotel/motel model.
At present, there is no statewide regulatory scheme for STRs in the State of New York. Instead, there exists a patchwork of local municipal regulations, with their attendant variations in regulatory requirements and legal challenges to those regulatory schemes. Regulation has proliferated at the local level because of the impact of STRs on communities. A chief complaint of neighboring properties is that STRs create nuisances, including increased noise, light, garbage, parking, people, and disturbances. STRs have an increased burden on local municipal services, such as police, sewer, fire, ambulance, and infrastructure. While local regulation seeks to address these issues, the impact on local services through real property taxation – the source of their funding — has yet to be addressed. Thus, absent statewide guidance and legislation that regulates STRs and provides uniformity in their assessment and taxation, the very local services that are the most burdened by STRs will continue to lack any ability to recoup the increased cost of those services through real property taxation.
STRs are generally defined as properties that are rented for thirty (30) days or less. While some STRs are owner-occupied residential properties that are sometimes rented for short-term stays, the vast majority are owned by investors. These properties are not used primarily for residential purposes but instead are primarily used for transient occupancy, which is a commercial, income-producing use. Income-producing properties are valued differently from residential properties and are often assessed and taxed differently as well.
Some taxing jurisdictions have different tax rates for residential and commercial properties. And even in jurisdictions that do not have different tax rates, assessors may have different methodologies for assessing commercial and residential properties, which may result in different assessed values. Both scenarios generally result in higher taxes for commercial properties.
The constitutional requirement of real property taxation is that similarly situated properties must be treated uniformly for purposes of taxation. Thus, assessing STRs as if they are residential real property undervalues them for purposes of real property taxation and results in inequitable taxation between STRs and other transient occupancy properties. This results in unfair competition in an already difficult, post-pandemic market for hotels and motels, and places the added burden of the transient use on local municipal services on residential real property owners instead on the STRs.
STRs are now generally subject to sales and occupancy taxes, but there has been no effort address their status for purposes of real property taxation. Statewide legislation is now pending to regulate STRs. Efforts to provide uniform, statewide governance that also addresses the assessment of STRs as commercial, income-producing, transient occupancy property will facilitate the legitimate governmental objectives of equitable taxation and offsetting the increased burden on local municipal services by directly tapping them as a source of tax revenue to fund those very services that are the most burdened by the use. Local taxing jurisdictions, as well as the hotel/motel industry, should support these legislative objectives to level the playing field between similar uses and achieve equitable taxation.
This is not intended to be legal advice. You should contact an attorneys to discuss your specific situation.
Kara Cavallo is a Partner with the firm and practices Tax Certiorari. She can be reached by phone at 845-764-9656 and by email[/column] 
