Short-Term Rentals: A Regulatory Minefield

Short-Term Rentals: A Regulatory Minefield

Understanding the Hierarchy and Importance of Real Estate Regulations

For real estate investors and property owners, navigating the web of regulations that govern property use is essential for both compliance and profitability. These rules exist at multiple levels—federal, state, county, city, subdivision, and homeowners’ association (HOA)—and each plays a distinct role in shaping what you can and cannot do with your investment property. Here’s an expert breakdown of the regulatory hierarchy and why each layer matters.

The Hierarchy of Real Estate Rules

Key Principle: No lower-level rule can usually override a higher-level law. For example, an HOA cannot permit something that state law prohibits, and city zoning will always trump HOA guidelines if there’s a conflict

Why Each Layer Matters

• Federal & State Laws: These establish the broadest protections and requirements, such as anti-discrimination in housing or statewide rental restrictions. For example, even if an HOA’s CC&Rs attempted to ban rentals based on family status, such a rule would be unenforceable due to the Fair Housing Act
  
  
• County/City Ordinances: Local governments often set the most impactful rules for investors, including zoning (what type of rental is allowed where), permitting, occupancy limits, and tax collection. For instance, short-term rentals may require a city permit, subject to guest numbers, no of rooms, serving food and duration limits.
• Subdivision/Plat Maps: These recorded documents define property boundaries, access, and shared responsibilities, which can affect development, parking, and maintenance obligations.
• HOA Documents & CC&Rs: These set the standards for community living, including architectural guidelines, pet policies, parking, and—crucially for investors—rental restrictions. CC&Rs are legally binding and “run with the land,” meaning they apply to all future owners. However, they cannot contradict higher-level laws
  
  

Business Registration Requirements

• General Business License: Many jurisdictions require property owners operating short-term rentals, boarding houses, or similar accommodations to obtain a general business license, even if renting out a single room or unit. For example, in Washington, D.C., all short-term rental operators must obtain a Basic Business License with the appropriate endorsement (e.g., "Short-Term Rental" or "Vacation Rental")
  
  
• Specialty Licenses: Some areas require additional or specific licenses for boarding houses, bed and breakfasts, or transient lodging. For instance, Montgomery County, MD, mandates a separate license for short-term residential rentals and bed and breakfasts, each with its own fee and renewal period. Operating without the required license can result in violations and fines
  
  

Tax Obligations

• Transient Occupancy and Lodging Taxes: Short-term rental and boarding house operators are typically required to collect and remit transient occupancy or lodging taxes, which are separate from standard property taxes. These taxes are often calculated as a percentage of gross rental receipts and may include additional per-night fees. For example, Virginia Beach imposes a combined lodging and sales tax totaling up to 16.5% of gross rental income, plus a nightly fee, all of which must be remitted monthly.
  
  
• Business Tax Registration: In addition to collecting occupancy taxes, operators often need to register their business with local tax authorities to ensure compliance and proper tax remittance. Failure to register and report can result in penalties, interest, and statutory assessments.
  
  
• Income Tax Treatment: The IRS and many states treat income from boarding and short-term rentals as business income, which may be subject to self-employment tax if substantial services are provided (such as meals, cleaning, or concierge services). This classification affects allowable deductions and reporting requirements.
  
  

Boarding Houses: Additional Considerations

• Commercial Licensing: Operating a boarding house is often considered a commercial activity and requires a specific license, distinct from a standard rental property license. Licensing requirements can include inspections, safety compliance, and ongoing reporting of resident information and financial statements.
  
  
• Taxation of Boarding Income: Income from boarders (who receive both lodging and meals) is generally treated as earned income, and the cost of providing meals and lodging can be deducted as business expenses. However, commercial boarding houses are typically required to be licensed as commercial enterprises, and their income is subject to different tax rules than standard residential rentals.
  
  

Bottom Line:

1. Successful real estate investment depends on understanding and respecting the full hierarchy of regulations—from federal law down to HOA rules and CC&Rs. Each layer serves a purpose, and none can be ignored. For short-term rentals and other specialized uses, diligent research and ongoing compliance are essential to avoid costly mistakes and maximize your property’s potential
2. In addition to zoning, HOA, and CC&R restrictions, many regulatory bodies require business registration and impose separate taxes for certain types of boarding and short-term rental operations. This is a critical consideration for real estate investors, especially those exploring short-term rentals, boarding houses, or similar uses.