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Property taxes would more than triple for Colorado short-term rental owners under proposal

The website for Airbnb's Colorado listings as seen on Sept. 27, 2018. Lawmakers have suggested a major tax change for short-term rental properties that could drastically change the industry as it stands in Colorado. (Eric Lubbers/The Colorado Sun)
State Sen. Chris Hansen, a Denver Democrat, said the change is aimed at ensuring schools and fire departments have enough local funding

Property taxes on short-term rental properties in Colorado would more than triple under a bill drafted by state lawmakers that comes as communities from Durango to Denver grapple with surging numbers of vacation rentals.

The proposal would tax vacation homes like hotels and motels, which are subject to a higher assessment, on the days they are being rented and deliver the extra revenue to public schools, fire departments, libraries and other districts that rely on property taxes.

State Sen. Chris Hansen, a Denver Democrat who sits on the powerful Joint Budget Committee and is leading the push for the legislation, said the idea is to boost revenue for local communities.

“There’s a really strong need for us to stabilize our property tax system and increase our local share,” said Hansen, referring to the rising education funding burden on the state budget. “If this is something we don’t get ahead of, it’s going to spiral out of control for the state.”

The draft bill comes amid broader conversations around short-term rentals in western Colorado. Town councils and county commissioners see limits and increased fees on properties rented through sites like Airbnb and VRBO as a way to ease a critical lack of affordable housing that is triggering a labor shortage.

In mountain communities, many think short-term rentals have already spiraled out of control. Many of them are cracking down on short-term rentals as new residents buy homes for record prices and more owners convert long-term rentals for local workers into vacation homes offered to travelers.

“It’s constantly being talked about. Every local government is hearing the same thing: These are really impacting our communities, our neighborhoods and our quality of life,” said Jon Stavney, executive director of the Northwest Colorado Council of Governments.

The city of Aspen as seen from a road above town. A new proposal would tax vacation homes in Colorado like hotels and motels, which are subject to a higher assessment, on the days they are being rented. (Jesse Paul, The Colorado Sun)

Voters in Avon, Crested Butte, Leadville and Ouray will consider ballot questions that increase taxes on short-term rentals. Telluride voters have two ballot questions that impose caps on vacation rentals. Councils and commissioners in several other communities have stalled or capped the flow of permits for vacation homes.

The new draft state legislation, which was developed this month from discussions in the General Assembly’s Legislative Oversight Committee Concerning Tax Policy and Task Force, would work like this:

If a home is rented as a short-term rental for more than 30 days a year, the owner must pay the lodging property tax rate for each rental day instead of the much lower single-family property tax rate. In other words, if a property is rented out as a short-term rental for 45 days, the owner must pay a commercial property tax rate on those 45 days in a year and the single-family property tax rate on the remaining 320 days.

A temporary reduction in the 29% commercial property tax assessment rate approved by lawmakers this year through Senate Bill 293 dropped the lodging property tax assessment rate to 26.4% for tax years 2022 and 2023 from 29%. Proposition 120, on the November ballot, would make that reduction permanent if it’s approved by voters.

The single-family property tax assessment rate is 6.9% for the next two tax years under SB 293. Lawmakers will then decide whether to continue the reduction or reinstate the 7.15% assessment rate.

The assessment rate works like this: If property’s fair-market value is $1 million, its assessed value for purposes of taxation would be $264,000 if it’s considered a commercial property. If it is considered a residential property, its assessed value would be $69,000.

The higher the assessed value, the more taxes the property owner pays.

Residential housing for sale is seen on Tuesday, Sept. 14, 2021, in Monument. (Olivia Sun, The Colorado Sun)

The policy change is really targeted at second homeowners and investment property owners. The 30-day threshold is considered a protection for owners who only occasionally rent their homes.

“You don’t want to create a bunch of overhead for somebody who is renting it occasionally,” Hansen said.

Still, Hansen is open to changing the threshold for when homeowners would have to start paying lodging property taxes on rental days.

“I’m not stuck on 30,” he said. “It’s just sort of the opening gambit.”

Mark Chapin, Eagle County’s assessor and the co-chairman of the Colorado Assessors Association’s legislative committee, is working with Hansen on how best to draw a line between investors who rent for returns versus owners who rent occasionally to offset costs.

Chapin worries that assessors in smaller communities will have a difficult time tracking down owners of vacation homes and then valuing their properties based on the number of days it rented to vacationers.

“It depends on the scope of the legislation and what the Legislature is trying to capture,” Chapin said. “If they are saying all short-term rentals need to be valued and placed on the tax roll … that is not daunting but it certainly would require more employees.”

But if lawmakers focus only on properties that are used exclusively for short-term rentals, Chapin said, “that changes that game.”

The focus for assessors in mountain communities is to help communities address long-term housing for workers as well as “treating everyone fairly and equitably,” Chapin said.

“Sen. Hansen’s concern is, from a real property valuation standpoint, that the short-term rental is the same as a hotel and motel, so their tax should be based on a higher assessment rate,” Chapin said.

Colorado Springs has one of Colorado’s most robust short-term rental markets. There are many investment companies that are acquiring and renting homes. But for a major city, the number of homes available for rent is not having a huge impact on housing for workers, El Paso County Assessor Steve Schleiker said.

Colorado Springs has one of Colorado’s most robust short-term rental markets. (Olivia Sun/The Colorado Sun)

Schleiker sees big differences between owners of short-term rental properties in urban counties on the Front Range and vacation home owners in resort-area communities. He wonders if a statewide policy on short-term rentals would work for both urban and rural communities.

Schleiker, who also serves on the board of the Colorado Assessors Association and was named Colorado Assessor of the Year in 2019, sees some challenges in switching short-term rentals over to commercial property tax assessment.

First, Schleiker pointed to the hundreds, if not thousands, of El Paso County’s military veterans and personnel who have mortgages through the Veterans Administration. They could have their note called if their homes are assessed as commercial properties, he said. Other lenders might also have issues with owners of residential homes being assessed at commercial rates, he said.

“That has already happened twice with two property owners … who converted a portion of their home to rent on Airbnb,” he said. (Those owners were refinancing, Schleiker said, and the appraisal report noted the rental operation, which alerted the Veterans Administration lender to a potential violation of their residential mortgage terms.)

Schleiker also worries that utilities and insurance providers may change their rates for homeowners whose properties are assessed as commercial.

“Our lawmakers need to be very, very careful looking at this,” he said. “I wonder if folks are looking down the road at the ramifications. I see more cons than pros, but I understand the purpose.”

Colorado representatives work as lawmakers try to wrap up the 2020 session in the State Capitol June 15 in Denver. (AP Photo/David Zalubowski)

Schleiker has an idea he thinks could work better. Why not create a new assessment for lodging properties, both hotels and short-term rentals, that falls somewhere between today’s commercial and residential rates? SB 293 set the model, Schleiker said, by carving out new property tax subcategories for multifamily homes and agricultural and renewable energy properties.

“If I have an opportunity to sit down with the governor or testify on this bill, I will be very vocal with my concerns,” Schleiker said. “Maybe there’s some middle ground with an assessment between commercial and residential for short-term rental properties offering lodging like a hotel and motel.”

The Legislative Oversight Committee Concerning Tax Policy and Task Force voted 5-1 last month to draft the legislation. The lone “no” vote came from Rep. Dan Woog, an Erie Republican.

“I just think that’s a local control issue,” Woog said. “I just don’t think the state Legislature needs to come in and create some blanket policy.”

Besides his big-government concerns, Woog also worried the policy change would result in higher prices for consumers.

That’s exactly the point, Hansen said.

“It’s essentially a pass-through,” he said. “If you have a lack of tax parity, you’re basically creating a tax subsidy for a lodging property and you get unintended consequences.”

Colorado State Sen. Chris Hansen, D-Denver, is leading the push for the legislation that would tax short-term vacation rentals like hotels and motels. (Andy Colwell/Special to The Colorado Sun file)

Hansen also brushed off concerns about keeping tabs on how many days a property is rented out.

“We’re obviously counting on the taxpayer to correctly report and remit, just as we do every other part of the tax system,” he said.

This is not the first time a Colorado lawmaker has tried to shift vacation rentals over to commercial taxation. In 2020, state Sen. Bob Gardner, a Colorado Springs Republican, introduced a similar piece of legislation. It was rejected, but not before creating an uproar among resort-town real estate brokers and short-term rental owners in the state.

Gardner said he was just trying to start a conversation about the tax parity issue.

Hansen is fully cognizant that his legislation is likely to prompt as much feedback as an Airbnb listing that makes false promises.

“I think there’s a very loud group that owns second homes that would like not to pay appropriate property tax,” he said. “I get that. We as the Legislature have a larger responsibility to have a sustainable funding mechanism for schools.”

Read more at The Colorado Sun

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