Room taxes on second homes
by Cape Business staffEnthusiasm is growing to extend room taxes to second -home rentals on the Cape. It’s seen as a way to help increasingly strapped Cape Cod municipalities during the current economic slowdown.
State lawmakers will consider requests from Provincetown and Brewster seeking to expand the current 9.7 percent tax on hotel, motel and inn room charges to include short-term rentals of three months or less. Under the proposal, approved by voters in those towns in November, homeowners would be taxed about $97 for every $1,000 charged for a rental – a cost likely to be passed on to vacationers.
Under current law, proceeds from the room tax are split, with the state getting 5.7 percent and the remaining 4 percent going to municipalities. It has represented about $22 million in total revenue.
About 10 Cape towns have expressed support for the expanded tax. Brewster Selectman Ed Lewis, who has been pushing for four years to tax vacation rentals of private homes and condos, credits the economic downturn with the idea's sudden and growing popularity.
“There's an increasing need to find a way to get money for the state and for everybody involved," Lewis told The Boston Globe. “The [bad] economy – if it wasn't for that, this and condos could double the amount they already get from the room tax.
However, could this be a pennywise and pound-foolish move?
A main reason Beacon Hill now may be willing to let individual towns impose the room tax on second-home rentals is the loss of property-tax revenues as home prices continue to fall and foreclosures rise.
Ironically, imposing room taxes on those who rent their homes in the summer actually could lead to even lower home prices and less property tax revenues. That’s because many second-home owners already are strapped to keep their residences here – and a room tax could be the proverbial last straw.
Their operating costs are up, they are not able to increase their rents due to a glut of seasonal rentals recently, and in many cases, these second-home owners are facing rising adjustable mortgage rates.
If they decide to sell in a down market, it could well contribute to even more inventory of unsold houses – and inevitably affect the home value of full-time residents who don’t rent in the summer.
To many Realtors and rental agents across the Cape, this is a case of playing with fire.
Yes, municipal officials are facing immediate revenue shortfalls – and they must balance the budget, preferably without imposing higher taxes on residents.
But the room tax issue is more like a ticking time bomb. Its true impact will take a year or two to play out.
Here’s what Cape Business editors learned in recent days by talking with real estate experts, second-home owners and our colleagues at WeNeedaVacation.com.
Of about 3,500 homeowners who list their property at WeNeedaVacation.com, only a very small percentage are considering even a slight rental increase this year.
That’s because so many people bought second homes as an investment in the early part of the decade that there now is a glut – even with healthy demand. And that was before the recession, which could likely impact renter demand this summer.
Some homeowners are even decreasing rents to stay competitive, reports WeNeedaVacation.com.
If a municipality imposed a nearly 10 percent room tax (5 percent to the state; 4 percent to a municipality), it would add between $150 to $250 per week to an average rental.
Absorbing that cost could be prohibitive for homeowners given rising utility and insurance costs. But passing it on to renters during a recession could lead to one of these eventualities: They would look beyond Cape Cod to rent a home; or they would spend the extra money – but at the expense of eating at local restaurants or shopping on the Cape.
The average stay in a hotel or motel is about 2 to 3 days, so a vacationer would pay about $30 to $45 in tax. Compare that to the average rental week or two, where the additional tax would be much more significant.
“For many homeowners, renting out their home is a necessity,” said Jeff Talmadge of WeNeedaVacation.com. “Absorbing the tax, which many will do, will result in a serious financial strain. And when you consider the problem of property insurance on the Cape, it makes home ownership much less appealing.”
Consider these issues as well:
• Second homes now represent nearly 45 out of every 100 single-family residences on the Cape.
• Owners of these homes spend about 1.6 times more money on the Cape than full-time homeowners.
• The homes represent a significant part of their investment portfolio, and that means they have lost between 10 percent and 25 percent of their value in the last three years.
• If owner are forced to sell for financial reasons, they may have to price these homes even below current market values because buyers who also view them as rental investments will be less willing to pay top dollar because of the room tax.
