-By Tracy Hess, CPA
On December 28, 2018, the Governor of Massachusetts signed legislation to extend its occupancy tax (sales tax) on residential rentals to include short-term rentals. The main target of the legislation was to tax rentals through hosting platforms such as Airbnb. However, the reach will extend well beyond that to our clients with rental properties on the Cape, or anywhere in Massachusetts.
Prior to this legislation the rental in a bed and breakfast, hotel, lodging house, or motel was taxed at 5.7%. The legislation adds “short-term rental” to the mix. Short-term rental is defined as the rental of at least one room in any owner-occupied, tenant-occupied, or non-owner occupied property, as long as the accommodations are reserved in advance. Property that is rented through tenancies at will, month-to-month leases, time-share property and property rented for more than 31 consecutive calendar days are not considered “short term rentals”. There is an exemption available if the property is rented 14 days or less in a calendar year as long as the operator (lessor) is properly registered with the commissioner, and has filed a declaration stating that they do not intend to rent the property for more than 14 days in the calendar year.
The legislation also allowed cities and towns to impose a local tax of up to 6%, although the city of Boston was allowed 6.5%. The legislation extends the local tax to short-term rentals as well. Here is the [list] of cities and towns currently imposing the additional local tax.
If a city or town has chosen to impose a local tax, they are now also allowed to impose a community impact fee of not more than 3% of each rental of a professionally managed unit within their city or town. A professionally managed unit is defined as “one of two or more short term rentals units that are located in the same city or town, operated by the same operator and are not located within a single-family, two-family, or three-family dwelling that includes the operator’s residence.”
If you are counting, as I suspect you are, so far these rentals are now potentially being taxed at 14.7%, or 15.2% in Boston.
Also established is the Cape Cod and Islands Water Protection Fund (CCIWPF), which is a separate fund under the Massachusetts Clean Water Trust. Property rented in a municipality that is a member of the CCIWPF, must also charge an excise tax of 2.75% to go into the fund. The fund currently covers Barnstable, Nantucket, and Duke Counties if it is subject to a wastewater management plan as defined by the regulations.
So, now for taxpayers renting out property on the Cape, the rental could be subject to 17.45% sales tax. Rentals for less than 14 calendar days per year do not apply to the above excise taxes. The application of the excise tax and local tax to short-term rentals, the new Cape Cod and Islands Water Protection Fund tax, and the new community impact fee takes effect on July 1, 2019 for contracts entered into after January 1, 2019.
Also starting on July 1, the legislation requires that operators of short-term rental properties maintain liability insurance of not less than $1,000,000 to cover the rentals. If the rental is offered through a hosting platform, you are exempt from obtaining the insurance if the hosting platform maintains coverage of equal or greater value.
The legislation further requires that the Commonwealth set up a public registry, which will require all operators to register and provide, at a minimum, a list of rentals offered including the street name and city or town. The regulations to implement this registry, however, do not have to be finalized until September of 2019.
Please contact us if you have questions about the new MA tax rates, or other tax topics at 401-831-0200.