Short-term rental industry seeks new opportunities in 2021

2020 was a wild ride for the vacation rental industry, which was hard-hit by the COVID-19 pandemic. The good news is that while travel and hotel stays are still down, the short-term rental industry has largely rebounded and is hoping for even better health on the horizon.

At the beginning of 2020, the industry had been in growth mode for years, but the COVID-19 pandemic slammed the brakes by early spring. Short-term rental operators suffered mass cancellations as travel plummeted, and were hit even harder when a number of local and state directives closed vacation rentals altogether as part of pandemic lockdowns.

With the aim of helping businesses and bolstering the economy, some states offered tax relief in the form of more time to file and pay as well as waived penalties and interest for late payments.

However, the 2020 vacation rental landscape turned out to be brighter than expected. As states loosened restrictions, demand for vacation rentals grew, especially those properties located in more remote or rural areas. They proved to be the perfect solution for pandemic travel, offering travelers the ability to get away while maintaining social distance and, in many cases, working remotely.

As the short-term rental industry settled into new normalcy by summer, governments resumed their scrutiny of the industry, continuing a yearslong trend of local authorities creating new laws to regulate vacation rentals.

These laws often include lodging taxes, which both hotels and vacation rental operators must collect from guests. Lodging taxes are locally determined and can be made up of sales taxes, tourism taxes, transient occupancy taxes, and more, often from more than one jurisdiction — for example, for the city, county, and state.

Because hotels have been more uniformly regulated, they’ve generally collected these taxes as a matter of course for years. But governments are increasingly taking steps to ensure short-term rentals do the same. Some governments have simply made it clear that short-term rentals are subject to existing lodging taxes, but others have created new taxes on short-term rentals — often an easier sell to the public than sales or income taxes because generally visitors, not residents, pay the tax.

With the pandemic slashing local government budgets, and hotel revenues suffering, the trend of governments looking to maximize lodging tax collection from vacation rentals is sure to continue.

While local governments have been ramping up regulations for short-term rentals for years, those rules have often been difficult to enforce, resulting in thousands of illegal vacation rentals in some cities and vast sums of uncollected tax revenue.

In the past, major short-term rental platforms such as Airbnb and Vrbo have fought attempts to force them to share information that would help authorities know whether properties are complying with local laws.

This year that started to change, as short-term rental platforms switched strategies in some cases from resistance to cooperation. For example, both Airbnb and Expedia — parent of HomeAway and Vrbo — signed memorandums of agreement (MOUs) with Kauai County and Honolulu in 2020. These deals will help those governments crack down on illegal vacation rentals by preventing them from advertising on the platforms. Similar agreements across the country could likely follow.

And in Denver, the city passed a measure to put the onus of licensing compliance on booking platforms, levying heavy fines on the platforms for each short-term rental listing found to be unlicensed. Denver is upping the ante by also making it illegal for booking platforms to retain revenue from unlicensed properties listed on their sites. Other cities will surely be paying attention to Denver’s direct-to-marketplace strategy.

Many cities have also hired third-party companies to identify short-term rentals operating in their markets, making it easier for governments to take action against lawbreakers.

This trend of identification and swift compliance action will likely continue in 2021 — making it imperative for short-term rental hosts to follow operating rules and comply with tax requirements.

While a few markets have placed new pandemic-related restrictions on short-term rentals in response to spikes in cases, that doesn’t appear to be a widespread trend. A post-COVID world will bring more competition for short-term rentals as travelers return to hotels, but the prognosis for the vacation rental industry looks promising.

However, local controversy, tighter regulation, and stronger enforcement will continue. Hosts who want to capitalize on the industry’s future potential will need to know the rules and play by them.

We can also expect some pandemic vacation trends such as “staycations” and road trips to thrive. 

MyLodgeTax can help automate and simplify tax compliance for short-term rental hosts. If you have tax questions related to vacation rental properties, drop us a line and we’ll get back to you with answers.