Public opinion on short-term rental properties — more commonly known as Airbnbs or VRBOs — has been notoriously fraught as the industry gains steam. One side hails the concept as a cheaper lodging alternative for tourists and a way for property owners to supplement their income; for others, Airbnbs are a neighborhood nuisance and further squeeze an already tight housing market.
Recently, another layer of that debate has materialized in the public discourse — whether these properties are considered residential or commercial, and accordingly, how they should be taxed.
El Paso County Assessor Steve Schleiker has thus far made no changes to how short-term rentals are classified for tax purposes. However, he has publicly acknowledged mounting pressure from the hotel/motel and bed-and-breakfast industries for local and state officials to impose what they perceive as “fair and equal valuation and taxation.”
Schleiker, during a packed Sept. 10 open house in the Centennial Hall auditorium, said, “Short-term rentals and Airbnb properties have been a topic of conversation and debate at the local and state levels over the past two or three years. This is just not an El Paso County matter. This is a state matter.”
He later added that he never intended to start picking up Airbnbs as non-residential properties.
“It would be premature of me to change these properties over when I feel we, as a community, need to do our homework,” he said. “We all collectively need to put these ideas together and figure this out. I don’t want the state shoving something down our throat.”
Commercial vs. residential
Per the Gallagher Amendment, 45 percent of total state property tax collected must come from residential property, with the remaining 55 percent coming from commercial property, Schleiker said. The amendment further mandates that the assessment rate for commercial property hold steady at 29 percent of assessed value. The residential rate, on the other hand, is annually adjusted to meet the 45 percent requirement. In 2019, residential properties were taxed at 7.15 percent of assessed value.
“There are rural counties that have experienced budget cuts because they are not seeing the same hot market like we are here along the Front Range, so the state was sitting there looking at, ‘Do we charge short-term rental Airbnbs commercially?’” Schleiker said. “That additional revenue will make up for the loss in the residential assessment rate.”
That proposition did not gain traction during the 2019 legislative session, but Schleiker said he expects to see the topic resurface next year. If it becomes law, El Paso County property owners who rent out their homes as Airbnbs could see their tax bills quadruple, the assessor said.
“If you have a $300,000 property, at the residential rate of 7.15 percent, taxes are about $1,600 a year,” he said. “You change that same property to non-residential, it quadruples the taxes to about $6,500 a year.”
Several senior citizens in the audience, who rent out their properties as Airbnbs to supplement a fixed income, worried they might lose their homes if subject to a 29 percent commercial tax.
“Long-term rentals can’t pay enough to pay my mortgage,” one woman said. “My property taxes take 1/12 of my entire income. … I am not comfortable with somebody living there full-time. Airbnb verifies and checks everyone that comes in.”
Aside from the obvious strain on property owners’ wallets, Schleiker has a whole host of other concerns that come with taxing Airbnbs at the commercial rate. A big part of that is the identification of these properties, which rarely have signage identifying them as anything other than a residence, he said. While the city licenses and keeps track of short-term rentals within its jurisdiction, the county does not, Schleiker said.
Additionally, property value is assessed as it stands on Jan. 1 each year and does not account for properties that shift from commercial to residential use or vice versa, Schleiker said. By current law, if a property owner claimed in the appeals process that their home was not used as a short-term rental as of Jan. 1, Schleiker would be required to convert the property back to residential, he said.
“Who is it of me to sit there and say otherwise to the property owner?” Schleiker said. “Do I go search websites? So you see where this is going.”
Homeowners could also run into issues with their mortgages. As many lenders require a property to be used primarily as a single-family home, Schleiker said. For an active-duty military member who lists their home on Airbnb while deployed, the consequences could be especially dire.
“The VA does not lend on commercial property,” Schleiker said. “They’re going, ‘Why did the taxes go from $1,600 to $7,000 a year?'”
Non-residential property owners must also submit an annual Business Personal Property Tax form listing equipment associated with their business — which, for Airbnb owners, could mean regular household appliances like a refrigerator or stove, Schleiker said. The city and county do not collect the BBPT, but Schleiker is still responsible for gathering that information and assessing it for other taxing entities, such as school and fire districts, he said.
“Right now… if the actual value of your equipment on that property is $7,700 or less, you’re exempt,” Schleiker said. “We don’t need to know anything about it, but if you’ve got a hot tub, that is subject to the business personal property tax.”
Valuing residential and non-residential property differently could also limit the potential buyer pool for a property owner looking to sell their home, Schleiker said.
“You own a property in an area where the median value is $250,000, but [your short-term rental is] doing extremely well and based on your income, the property value is $400,000,” he said. How many people, if you were to go sell that property, would actually come to your house and say, ‘Yeah, we want to go ahead and pay $400,000?’ … They’re going to go to the same house down the road that’s valued at $250,000.”
Neighbor concerns, shifting technology
Schleiker estimates there are anywhere from 3,000 to 3,500 short-term rental properties in El Paso County. While the city of Colorado Springs stipulates that owners cannot host commercial events at these properties, the county does not — which some residents say is affecting their quality of life.
One man told Schleiker that a house across the street — which is not owner-occupied — can sleep 28 people and frequently hosts weddings.
“I don’t see, as an assessor, how you can’t make him commercial,” he said.
Schleiker agreed, but reiterated that it boils down to the discovery of these properties.
“I’m not the land use guy in the county,” Schleiker said.
Some bed-and-breakfast owners contended that even owner-occupied Airbnbs are no different than their businesses, and should be taxed accordingly. Welling Clark, who owns Holden House 1902 Bed & Breakfast Inn in Westside Colorado Springs, called Airbnbs the latest iteration of an ever-evolving lodging industry.
“I would like to leave with you that you can never stop the evolution of an industry, but what you’re doing right now is laying the groundwork,” Clark said. “This industry needs to harness and come to play with the rest of the lodging industry.”