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Staying on the right side of Airbnb rules, regs and taxes

by Scott Klocksin

Short-term rentals have changed the face of travel — and they’ve had a major impact on real estate in the process. Those who invest in property have taken notice, and so have regulators.

In Chicago, STRs are governed by a hulking, 58-page ordinance, and there are other restrictions layered on by city regulators and condo boards. So, if you or one of your clients are looking to buy an investment property with an eye toward listing it on a platform such as Airbnb, where do you start?

Do your location homework

As with everything in real estate, the first question to ask is where, according to Shorge Sato, principal and founder at Shoken Legal and legal council to pro-STR lobby group Keep Chicago Livable.

Aside from its proximity to amenities such as dining, entertainment and public transportation, Sato advised agents to look at the zoning the building falls within. Areas zoned for residential and mixed uses are the most likely to allow STRs. But as we all know, this is Chicago, which means things often aren’t what they seem on the surface. For example, some residential buildings were built in what later became industrial-zoned districts, and while those buildings are exempt from most requirements of an industrial zoning classification, STRs still aren’t allowed in them. You’ll also want to check with the city clerk’s office to see if the property falls within a restricted precinct.

Furthermore, make sure to do some research into the neighborhood and the alderman’s history of friendliness or hostility to STRs. “It makes everything smoother and easier as a host if the alderman is friendly to STRs. If you find yourself needing to apply for a waiver of any kind, that will go through the alderman. They have a lot of power,” Sato said.

An alderman’s blessing can be critical if the property you’re looking at lies in any kind of legal gray area. And, Sato said, you’ll also want to gauge how friendly the neighborhood as a whole is to having STRs in the community. An alderman may start out supportive of STRs, but if they get the sense that their constituents don’t agree, this may change.

Understand the property’s past

A good roadmap for whether a property will work as an STR, Sato said, is its history. Has a particular home ever held a license from the city to be used as an STR? And if so, was it ever necessary that a waiver be granted by the alderman to give it that status? A new owner would have to reapply for such a waiver, but if one was granted in the past, Sato said it’s a good sign. And, conversely, if a previous owner was ever denied a license to use a unit as an STR, that’s a red flag. A seller’s agent is required to disclose whether such licenses have been applied for or granted at the time of an offer being made.

Owners of buildings with four units or fewer can file a commissioner’s adjustment with the city to make the case that income from listing a home as an STR is an essential part of a household’s total income. “It can be a longshot,” Sato said, “but I’ve secured licenses for clients this way, so it can be an option.”

Size matters

The intended use of a property is important to consider, Sato said. Since they were originally built as rental dwellings, entire units within a classic Chicago two-, three- or four-flat typically aren’t fair game for STRs. But if an owner can prove that one of the units is their primarily legal residence (generally, living there 245 days of the year), the city will often allow it.

That requirement of primary residency doesn’t apply in buildings with five or more units. But here’s where it gets tricky: The city imposes a cap of 25 percent of units in a particular building — or six units, whichever is smaller — as eligible to rent as STRs. In most cases, that means it will take some luck to be one of those who are allowed to rent their units as STRs in a large building, as those caps are usually met quickly.

You’ll also need luck, though, with regard to a building’s specific policy. Sato said some property managers allow STRs in condo buildings and some have added buildings they manage to the city’s list of properties where the practice is prohibited.

Know what you owe

Chicago taxes STRs at one of the highest rates in the country — 23.4 percent. That’s about 6 percent higher than the city’s hotel tax. Rob Stephens, co-founder of Alvara MyLodgeTax, a subscription-based platform that prepares, files and remits taxes for owners of STRs, said 20 percent is closer to typical in cities around the country.

He advises staying on top of any potential changes in how certain types of dwellings are taxed — which is always a possibility when the ordinance governing STRs is so long and complex and has been subjected to legal challenges.

“Ignoring the tax you owe can really get you into some problems,” he said. “You can be slapped with some pretty stiff fines and penalties if you make a misstep. Just stay informed. It always behooves you to be proactive.”

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