Republican Bob Gardner from Colorado Springs has proposed a property tax increase in bill 20-109 that will tax nightly rentals as commercial property.  This bill is gaining support from local residents and city councils and will have substantial impacts on mountain resort communities.  Will this bill to increase property tax lead to a “collapse” in real estate prices as some are predicting?

 

What is in the bill?

The bill in a nutshell creates another classification of commercial properties called a non-residential unit.  A non-residential unit is a single family (or multifamily property) used for short term stays and occupied by the owner less than 30 days a year.

  1. Non residential units/short term rentals will be taxed at commercial property rates
  2. A short-term stay is classified as any stay less than 30 days
  3. If an owner occupies the property greater than 30 days a year, the property is taxed at the residential rate
  4. Commercial property tax rates are approximately three times residential property tax rates. For example, if you owned a condo in Copper Mountain (Summit County) valued around 500k, the taxes are around 3500 today, with the new law taxes would be approximately 10,500 leading to a $7,000 increase in property taxes for the owner
  5. This bill is currently working through the Colorado Senate. Here is a link to the full text of the bill: https://openstates.org/co/bills/2020A/SB20-109/

 

 

Who is supporting?

  1. Many Cities/Municipalities: Breckenridge Town Council member Gary Gallagher said the council generally supports a bill like this that applies to short-term rental properties that are being run like a business rather than families who just want to rent out their property a few times per year.
  2. Many primary homeowners in resort communities: Resort communities throughout Colorado have gotten very expensive for full time residents.  Many full-time residents correctly/incorrectly put blame on nightly rentals for soaking up many of the properties that traditionally have been used for longer term rentals.

Who is against this bill?

  1. Realtors: Realtors have come out in force against this proposal as they feel that it will hurt property values and substantially reduce the volume of transactions in the resort communities.
  2. Property Management Companies: With higher taxes many property owners will opt to not rent their properties short term. They will either take their properties totally out of the rental pool or transition to more longer-term rentals.
  3. Nightly rental homeowners: This is the obvious one.  Nobody likes to pay more in taxes.  Short term property owners will have a huge impact to their bottom line if this legislation passes.

 

What is the impact on real estate?

A local Breckenridge property manager was quoted in the Summit Daily : “For those of us who live in the mountain community, it will be a collapse in real estate prices because the people who own here … are heavily dependent on tourism for our sales tax dollars. If these homeowners are taxed 3.14 times more … they simply won’t rent, and then they’ll choose to sell,”

I would 100% disagree that this new increase in property taxes would lead to a “collapse in real estate prices”.  This is an impossible outcome for two primary reasons:

  1. Inventory: There is little inventory in the resort markets. For example in December inventory in Breckenridge was down 27%. (this same scenario is playing out in every resort community in Colorado with highly constrained inventory)  With inventory this tight any new supply would quickly and easily be absorbed by the market with little if any impact on prices.   Furthermore, demand will remain high/continue to increase due to the quality of life in the various resort communities.  Basic economics show the impossibility of a real estate collapse as supply is tight and demand is growing.
  2. Absorb the cost: Many nightly rentals in the resort communities have the ability to absorb part of the costs and/or pass it on to renters with higher rates.  According to Evolve, a Denver based company that manages vacation rentals in Summit County the median revenue generated by a three-bedroom vacation rental in Summit County was at $33,230 furthermore the owner of a nice 5-bedroom home could generate over $100,000 in income.  Even with higher taxes nightly rentals will remain profitable.   I don’t see a large percentage of homeowners rushing to the door to sell their properties.

Summary

Although the proposed property tax increase on nightly rentals will clearly create winners and losers, it will not lead to a “collapse in real estate prices” as predicted by some mountain real estate professionals.  The market will adapt to this change in tax structure with minimal impact on property values one way or the other as resort communities have extremely low inventory and substantial pent up demand.  How the real estate market will react to the changes is pretty straightforward, the difficult part is determining if this bill will actually pass with the various special interests lobbying.

 

Additional Reading/Resources

  1. https://openstates.org/co/bills/2020A/SB20-109/
  2. https://coloradohardmoney.com/denver-real-estate-inventory-plummets-2019/
  3. https://www.summitdaily.com/news/state-senator-proposes-classifying-short-term-rentals-as-commercial-property-leading-to-a-tax-hike/
  4. https://www.summitdaily.com/news/in-summit-county-vacation-rentals-often-but-not-always-more-profitable-than-long-term-leasing/

 

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Written by Glen Weinberg, COO/ VP Fairview Commercial Lending.  Glen has been published as an expert in hard money lending, real estate valuation, financing, and various other real estate topics in Bloomberg, Businessweek ,the Colorado Real Estate Journal, National Association of Realtors MagazineThe Real Deal real estate news, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.

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