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The state legislature is considering a bill that would tax residential nightly rentals (any rentals less than 30 days) as commercial properties. This would change the tax assessment on a statewide level. On the surface it doesn’t seem like a big deal, but commercial properties are taxed differently than residential properties in Colorado. Residential properties are taxed at 7.2% and commercial is taxed at 29%. For a commercial property the taxes are approximately 4.14 times higher than for a residential property.
Why are they doing this?
Many municipalities would much rather have commercial properties as opposed to residential properties as they bring in substantially more in property taxes. Nightly rentals are essentially “hotels” as they are rented nightly so many assessors feel this is a fair way to assess them.
What do the numbers say?
I looked at two properties, one in a ski town (Steamboat Springs) and one in unincorporated Jefferson County. I confirmed the current taxes with the respective county and then calculated the new tax rate with the commercial zoning. Below are original taxes and the amount of taxes paid if the bill passes.
- A house in Jefferson county:
- Value: $ 500,000
- Current taxes: $3,000
- New commercial taxes: $12,429
- Increase: $9,429
- A house in Steamboat:
- Value: $1,500,000
- Current taxes: $5,100
- New commercial taxes: $21,114
- Increase: $16,014
How does this impact you?
To see the impact on your taxes if you own a nightly rental take the current tax bill and multiply it by 4.14 to get the new tax amount. In Breckenridge and most resort communities this would increase tax revenues substantially as 20% of residential properties are used for nightly rentals (Denver Post). I think this number should be substantially higher as many nightly rentals are not registered (50% of airbnbs in Denver are not registered)
Unlike many of the other proposals to shore up local finances that would require a constitutional amendment, the proposal to tax nightly rentals as commercial properties could be a legislative fix (CO property tax proposals)
What does this mean for values?
The increase in taxes could change the dynamics of nightly rentals in many areas as the taxes go up substantially. I’ve mentioned in previous articles that the ability to rent nightly is not set in stone and residential properties should not be valued on their nightly income potential. This amendment could radically alter the economics of a nightly rental investment overnight and substantially impact values as the income from the rental property could decline substantially.
- (CO property tax proposals): full pdf with details from the Colorado legislature
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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 the Colorado Real Estate Journal, the CO Biz Magazine, The Denver Post, The Scotsman mortgage broker guide, Mortgage Professional America and various other national publications.
Fairview is the recognized leader in Colorado Hard Money and Colorado private lending focusing on residential investment properties and commercial properties both in Denver and throughout the state. We are the Colorado experts having closed thousands of loans throughout the state.
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