Should Airbnbs Be Taxed as Residential or Commercial?

(Source: Wikimedia Commons.)

Most of us remember playing musical chairs as a kid. We’d grab the dining room chairs and set them up in a circle, giggling and eyeing each other as we walked around and around in anticipation for the music to stop. And once the music did stop, the tense walk would turn into a race of who could plop down on the open seats first. Someone would always be left standing, or sitting on the lap of another, since they moved too slowly, and would be forced to sit out for the rest of the game. 

Many people have used the concept of musical chairs to relate to housing shortages in Northern America. We’re all playing a game, but instead of a race to see who can sit down the fastest, it’s usually centered around who can acquire the most cash flow and buy up the market.

Imagine there’s two potential homeowners and two potential homes. Person A has more cash than person B and buys one of the available homes. Before person B can save enough to purchase the second home available, person A decides to go ahead and buy it. Now person A owns the entirety of the market. They decide to rent out the second property they purchased—but, instead of creating a long-term rental that the second citizen can afford, they create a short term rental, such as an Airbnb, because that will ultimately create a higher cash flow for them. 

This is an overly simplified example of one version of Housing Musical Chairs we citizens face in the housing market. It’s not saying short-term rentals are bad, but merely another stone we must juggle in our capitalistic game of life. But let’s take it a step further and examine short-term rentals past how they can potentially affect the housing market, and how they play a role in contributing to our local economy.

Property taxes represent a large source of public revenue for local governments and pay for the majority of vital services the state provides. In North Carolina, public education, infrastructure, and safety are just a few of the categories covered by property owners. 

A few weeks ago, Joe Minicozzi from Urban3 presented to the Asheville Buncombe County Ad Hoc Committee about property tax inequities riddled within the state, and suggested some possible solutions on how to fix them. Urban3 has been researching property tax inequities in North Carolina for over a year. Since 2012, the firm has been working to help local governments take charge of their financial future with revealing visualizations of financial analysis. Their work has expanded internationally and they’ve received awards and recognition for their use of 3-D modeling software. 

One topic Minicozzi dove into within his presentation was short-term rentals and how they are taxed. 

There’s a street in Asheville that when you pass by in your car, you’d assume it was a group of residential homes—but it’s not. Each house on that block is an Airbnb, some of which are rented up to almost $2,000 for one night: a staggering amount compared to local long-term rentals in Ashville, which have a reported median two-bedroom monthly rent of $1,771. 

There are two types of property tax an owner can be charged: commercial or residential. In North Carolina, and most other places within the United States, Airbnbs are placed under the residential property tax bracket. Within his presentation, Minicozzi questioned the legality of this reality in our current system.

This is a difficult topic to tackle, especially when it comes to Airbnbs and other short-term rental services' ability to be diverse. One resident could rent out a room in their house, while another could rent out an entire house (which also applies to long-term rentals). It can be a side income where a renter only opens their availability for a few days of the month, or a full-time income where the building is only used for rental purposes. The conversation of how short term rentals should be taxed isn’t a new one. 

In North Carolina, the General Statutes outlines a guidance on how the property tax should be determined. Each parcel is examined by looking at its advantages, disadvantages, location, zoning, adaptability of residence, commercial, industrial, income, and more listed in the image below. Concerning whether a property should be treated as commercial or residential, in his presentation, Minicozzi outlined the idea of a resident and questioned what counts as “a resident” to create a residential property. Can a home-style property that is solely being rented out with no long-term in-house owners be considered a residential property? 

Specifically concerning this street of Airbnbs, Minicozzi argues that no, they cannot be considered residential, because there are no residents residing within the house. They should be listed as commercial property because the amount of revenue reaped from the property is equal to a commercial business. 

In fact, with a little Google searching, Minicozzi discovered that most of these Airbnb properties on this street are listed under a business name, and the owners publicly display their home in residence to be in Florida, not the properties listed as residential in North Carolina. 

Why is it so important that we discuss this? It’s important to ensure that each property is being assessed correctly. Otherwise, we run into a multitude of issues such as the property tax burden being shifted from owners of larger and more expensive properties to people who own smaller and less expensive homes. 

We also have to think further down the line. Cities are responsible for managing resources (i.e., property) in a way that benefits shareholders (i.e., residents). With property taxes being a major source of income for state governments, we have to ask ourselves, what is the true cost if we are not appraising or assessing properties accurately? If the state is potentially losing out on millions of taxable dollars because parcels have been incorrectly assessed as residential while they perform as commercial then who is that affecting? It’s also worth considering that taxing short-term rentals more fairly may also end up leaving a few more homes on the long-term rental or purchase market, freeing up some much-needed chairs in our current experience of Housing Musical Chairs.

Just Accounting for Health (JAfH), which Strong Towns is a part of, is a consortium partnered with Urban3 researching tax inequities specifically in relation to Western North Carolina, as well as exploring implications of this system across the country. The project is aimed at better understanding the presence and effects of biases in tax assessment standards and bringing to light hard questions we must answer. Further along in the research, JAfH will be answering the question, “How do systemic biases in local property tax policies and practices influence health equity in Western North Carolina?”

If you’re interested in learning more about how property taxes affect you and your community, follow along by signing up for email alerts.

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