Renting out property can be a profitable business, but the legal requirements differ significantly based on whether you’re offering short-term or long-term rentals. Each type of rental comes with its own set of regulations, tax obligations, and business licensing needs. Understanding these differences is essential to operating legally and maximizing profits.
In this guide, we’ll break down the legal considerations for both rental types and help you determine if you need a business license for your rental property.
What’s the Difference Between Short-Term and Long-Term Rentals?
Before diving into the legal aspects, let’s clarify the main differences between short-term and long-term rentals:
1. Short-Term Rentals
- Typically rented for 30 days or less at a time.
- Common on platforms like Airbnb, VRBO, and other vacation rental services.
- Often rented for vacations, business trips, or temporary stays.
2. Long-Term Rentals
- Generally leased for six months or more, often a year.
- Tenants use long-term rentals as their primary residence.
- More stability for the landlord with less frequent tenant turnover.
Do You Need a Business License for Short-Term Rentals?
Short-term rentals are subject to stricter regulations compared to long-term rentals due to their transient nature and impact on local housing markets. Many cities and municipalities require short-term rental operators to obtain a business license or permit.
Local Examples:
- San Francisco, CA: Operators must register for a Short-Term Rental Business License and comply with limits on how often the property can be rented.
- Austin, TX: A Short-Term Rental (STR) License is required, and there are zoning restrictions limiting where these properties can be located.
In addition to a business license, short-term rental hosts may need to collect and remit occupancy taxes, similar to hotels, and comply with specific insurance and zoning laws. Violations of local laws can result in heavy fines or the forced removal of the rental listing from platforms.
Do You Need a Business License for Long-Term Rentals?
Long-term rentals generally face fewer restrictions compared to short-term rentals. In many areas, renting out a property on a long-term basis does not require a specific business license unless you own multiple properties or are operating as a formal property management business.
Factors that May Require a Business License for Long-Term Rentals:
- Property Volume: If you’re managing multiple properties or units, some cities may classify this as a business.
- Commercial Properties: Renting out commercial space will almost always require a business license.
- Local Regulations: Some cities, like Los Angeles, require all landlords to register for a business tax certificate even for residential long-term rentals.
While long-term rentals tend to be less regulated, landlords are still responsible for understanding tenant-landlord laws, health and safety regulations, and local tax requirements.
Licensing and Permits for Short-Term Rentals
The licensing process for short-term rentals can be more complex due to stricter rules around housing availability and community impacts. Here’s a general process for obtaining the required licenses and permits:
1. Check Zoning Laws
Local zoning regulations may restrict where short-term rentals can be operated. Some neighborhoods or buildings may prohibit them altogether. For more information, read our article on the effect of zoning laws on rental properties.
2. Obtain a Short-Term Rental Permit or License
Cities often require short-term rental operators to apply for a permit or business license. The application typically requires:
- Proof of property ownership or authorization from the owner.
- A description of the rental unit.
- Payment of licensing fees.
3. Comply with Occupancy Tax Rules
In many areas, short-term rental hosts are required to collect occupancy taxes (similar to hotel taxes) from guests and remit them to the local government. Airbnb and other platforms often help facilitate this process, but it’s essential to stay informed of your tax obligations.
4. Maintain Compliance with Local Laws
Many cities require regular renewals of short-term rental licenses and may limit how many nights per year the property can be rented.
Legal Considerations for Long-Term Rentals
For long-term rentals, the legal framework is typically simpler but equally important to follow. As a landlord, you’ll need to comply with tenant-landlord laws, maintain the property to legal standards, and ensure fair housing practices.
1. Lease Agreements
A legally binding lease agreement is essential for long-term rentals. This agreement outlines the terms of the rental, including the duration of the lease, rent amount, and tenant responsibilities.
2. Tenant-Landlord Laws
Landlords must follow tenant-landlord laws specific to their jurisdiction, including security deposit regulations, eviction processes, and maintaining habitability standards.
3. Health and Safety Inspections
Local governments often require landlords to meet health and safety standards, ensuring that the rental is habitable. Some cities may conduct inspections, especially if the property is part of a rental registration program.
4. Fair Housing Laws
Landlords must comply with Fair Housing Laws to avoid discrimination in renting practices. This includes treating all prospective tenants fairly regardless of race, religion, gender, or other protected characteristics.
Tax Implications for Short-Term vs Long-Term Rentals
Taxes are an important consideration for both short-term and long-term rentals, but the obligations differ depending on the type of rental you offer.
Short-Term Rentals:
- Occupancy Taxes: Short-term rental hosts may be responsible for collecting and remitting hotel or occupancy taxes to local governments.
- Self-Employment Taxes: If you actively manage a short-term rental, you may need to pay self-employment taxes on your income.
- Income Tax Reporting: Even if your property is rented short-term, all income must be reported to the IRS. Deductions such as utilities, property management fees, and repairs are still applicable.
Long-Term Rentals:
- Rental Income: Long-term rental income must be reported as taxable income, but landlords can deduct many related expenses, including mortgage interest, property taxes, insurance, and depreciation.
- Passive Income: Long-term rental income is generally considered passive income, meaning it is not subject to self-employment taxes, though all rental income must still be reported on your tax return.
Pros and Cons of Short-Term vs Long-Term Rentals
Short-Term Rentals:
Pros:
- Higher rental income potential due to nightly rates.
- Flexibility in personal use of the property when it’s not rented.
Cons:
- More frequent tenant turnover and management demands.
- Stricter legal and licensing requirements.
Long-Term Rentals:
Pros:
- Stable, consistent rental income.
- Fewer tenant turnovers and less frequent management.
Cons:
- Lower potential income compared to short-term rentals.
- Legal responsibilities for maintaining habitability standards.
Conclusion
Whether you choose to pursue short-term or long-term rentals, it’s essential to understand the legal and business licensing requirements for each. Short-term rentals often come with more stringent regulations, including the need for permits and occupancy taxes, while long-term rentals typically have fewer licensing needs but require compliance with tenant-landlord laws.
Before you begin renting, research local regulations to ensure you’re operating within the law and maximizing the potential of your rental property.