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If you own a Lawrence or Douglas County home that is rented through Airbnb, Vrbo or other such sites, get ready for a booking you may not like much — a doubling of your property tax bills.
The Douglas County Appraiser’s office recently sent a letter to nearly 200 such homeowners that notified them their properties will be taxed at commercial rates rather than residential rates. Commercial properties in Kansas are taxed at 25% of their fair market values, while residential properties are taxed at 11.5% of their fair market values. That means tax bills would more than double on those properties, if everything else remains equal.
County Appraiser Brad Eldridge — who is a longtime appraiser for the county but is in his first year leading the department — says the change is allowed by state law, and one could argue, is actually required by the state’s constitution.
“It is really not a change in policy,” Eldridge said in an interview with the Journal-World. “It is more just enforcing existing law.”
But it is not clear that any other county in Kansas is currently taxing short-term rentals — the legal term for properties rented via Airbnb, Vrbo or other such sites — as commercial properties. When asked whether other counties in Kansas were interpreting Kansas law to mean such properties are commercial for tax purposes, Eldridge didn’t provide any specific instances.
“I know it is a concern for several other counties,” he said. “They are trying to understand it too. I’m sure a lot of big counties are questioning this as well and how they are going to deal with it.”
Douglas County contends that the provision in the state’s constitution that requires uniformity in assessing properties for tax purposes requires the change. The reason is because hotels — another type of short-term rental — are taxed at commercial rates. The county argues that taxing homes that are used as short-term rentals as residential property while taxing hotels at commercial rates violate the uniformity provisions of the state’s constitution.
The county, however, acknowledges there may be a counter argument to that position. In a memo produced by the County Appraiser’s office, the county notes there is a state law that calls for small bed and breakfast properties — yet another type of short-term rental — to be taxed at residential rates. If small bed and breakfast establishments — defined as five or fewer bedrooms — are taxed at residential rates, why shouldn’t a single-family Vrbo home also be taxed at that rate?
The county, in its memo, answered that question by contending the state statute is in violation of the Kansas Constitution, although it is not clear any court has ruled as such.
“The county’s attorney has advised that constitution trumps conflicting statutes,” the county’s memo reads.
That interpretation creates a couple of questions. The first is whether bed and breakfast property owners also have received notice that they now will be taxed at commercial rates? I emailed that question to Eldridge after our interview but haven’t yet heard back.
The second question should catch the attention of people in a different industry: day care providers.
The same state statute in question — KSA 79-1439 — also specifically lists day cares that are located at a person’s residence. It says such home-based day cares should be taxed at residential rates. However, that creates a question of whether daycares are being taxed at two unequal rates — home-based entities that are taxed at residential rates versus free-standing daycare centers that are taxed at commercial rates.
I emailed Eldridge a question of whether the county was examining whether it should raise the taxation rates for home-based day cares, but I haven’t yet received a response.
As for the owners of short-term property rentals, the next 30 days may be critical for them in terms of future tax bills. Every property owner will have until March 29 to file an appeal with Douglas County related to their property tax valuations.
There are a couple of paths those appeals might take. A property owner could argue that the county is mistaken and the property hasn’t been used as a short-term rental — which under the county’s definition means any rental that lasted less than 29 days.
But, be forewarned: The county has been doing its research on that front. In Lawrence, short-term rental properties must be licensed, so the county appraiser’s office has access to that database. For properties outside Lawrence, the department has been looking around on websites like Vrbo and Airbnb to compile its own list of Douglas County properties that are available for rent.
The second path an appeal might take would involve a property owner contending that they only use a portion of their home for short-term rentals, and only for a portion of the year. Eldridge said the county in those instances could make adjustments to the tax rate.
For example, if only 1,000 square feet of a 2,000 square foot home was ever rented through Vrbo, then the county would have the ability under the law to tax 1,000 square feet of the house at a commercial rate and 1,000 square feet of a house at a residential rate. If a property owner also contends that they only provide their home for rental 10 weeks out of the year, for example, the county also might be able to adjust on that basis.
But Eldridge said property owners are going to need to provide documentation, which might include receipts and rental reports from their booking websites.
Another possibility in all of this is that a property owner ends up filing a lawsuit against the county, challenging its interpretation of the law. I don’t know how likely that is, as I’ve just started to hear from some property owners. What I can tell you is this issue has their attention, but I’m not sure how far they will fight it. In fairness, the county’s decision is likely popular with some groups, such as operators of hotels and maybe some neighbors who would like to see fewer short-term rentals in their neighborhoods.
The county also will be able to point to some precedents. Eldridge told me the county does currently assess some residential property at commercial rates. For example, people who file for a home business occupation license — that could be anything from a small craft shop to architects who use their homes as offices — have a portion of their homes assessed as commercial property.
As it stands now, short-term rental owners should prepare to be taxed as commercial properties. The change in practice required no approvals from the Douglas County Commission, since the determination was made that state law already calls for this type of taxation.
