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Why so few Airbnb permits? Could tax avoidance be a reason?
Airbnb offers a 'quick reference guide' for prospective Portland hosts on its website, essentially a checklist to get started. It mentions they need to file for a city business license, notify neighbors, file a permit application and get an inspection.Another Airbnb web page notes lodging taxes must be paid to Portland, Multnomah County and the state. It makes no reference to state or federal income taxes on earnings. However, a separate Airbnb handout on taxes encourages hosts to consult a tax professional for reporting their income.
When Michael Bednarek read a recent Portland Tribune article noting only one in five Airbnb and other short-term rental hosts bothered to get city permits — two years after a city ordinance required them to do so — he got to wondering why.
After all, getting a city permit to rent out spare bedrooms for the night is relatively simple, requiring a $178 fee and a bare-bones home inspection. The fee can be recouped via a couple days' rent from tourists, and inspectors only check for basic safety requirements: smoke alarms, carbon monoxide detectors and ways to exit bedrooms during a fire.
Bednarek figures some laggard hosts are trying to stay under the radar to avoid paying state and federal income taxes on their rental earnings.
"These people are earning thousands upon thousands of dollars in income from Airbnb," he says. "I am guessing that if almost none of them are getting the permits, they certainly don't think they have to pay taxes on the income.
"I would bet you dollars to donuts that the compliance rate is in the single digits on people paying taxes on all that income."
That is pure speculation, and tax matters are confidential so it's impossible to know for certain.
But it may partly explain why some 2,500 short-term rental hosts had failed to seek permits to operate legally in Portland as of late November — despite claims by Airbnb, the dominant operator here, that it encourages hosts to get the permits.
Do as we say, not as we do
San Francisco-based Airbnb declined interview requests on the issue raised by Bednarek, instead submitting a two-sentence response via email.
"We expect all of our hosts to follow local laws and have invested significant resources into helping them register, including holding 29 registration workshops and calling 2,000 of our most active hosts," wrote Laura Rillos, the company's press secretary for Portland.
"We've heard from many discouraged hosts that the city's registration process is too complicated," Rillos wrote, "and we remain committed to working with the city to streamline registration and increase compliance."
Yet Airbnb itself does not follow local laws in Portland.
Along with most other short-term rental companies operating here, it ignores a city ordinance requiring it to only list hosts' properties on its website once hosts get permitted.
(As of mid-November, the only company heeding the ordinance was Vacasa, which is based in Portland. But Airbnb also operates a sizable operation here, with more than 350 employees working in Old Town.)
Airbnb, along with a handful of other short-term rental companies, does collect lodging taxes from its Portland listings and delivers the proceeds to the city, Multnomah County and state.
Kathy Peterman, an Airbnb host in Southeast Portland, hears of many hosts who avoid the permit process for fear of what city inspectors might find, especially in older homes.
"I know a lot of hosts and none of them would ever think that income can't be claimed," Peterman says. "We have talks from H&R Block at our host events. We consult with one another and with Airbnb as hosts to try to do the right thing in regards to permitting. No one that I'm aware of has ever hinted at not claiming their Airbnb income."
Peterman's home inspection took five minutes. But she says hosts with older homes might be required to modify their windows or other parts of their home.
Those could be required for fire-safety reasons.
Airbnb role in income taxes
Airbnb offers a "quick reference guide" for prospective Portland hosts on its website, essentially a checklist to get started. It mentions they need to file for a city business license, notify neighbors, file a permit application and get an inspection.
Another Airbnb web page notes lodging taxes must be paid to Portland, Multnomah County and the state. It makes no reference to state or federal income taxes on earnings. However, a separate Airbnb handout on taxes encourages hosts to consult a tax professional for reporting their income.
Airbnb, as required by the IRS, does send hosts federal Form 1099-Ks each year if their properties grossed more than $20,000 and they they had more than 200 room bookings, Rillos confirmed. Copies are sent to the IRS.
But many hosts, including Peterman, say they don't reach both of those thresholds. Still, she says, hosts can easily determine their annual earnings from Airbnb to submit to their tax preparers.
From side businesses to livelihoods
For some Portland hosts, renting short-term rentals is a nice little side business. For others, it's a lucrative livelihood.
Portland Airbnb hosts averaged $10,769 in rent collections the past 12 months, says Sara Dupre of Airdna, an independent company that provides data analyzing Airbnb's worldwide operations. Hosts who rent out multiple sites would average that amount for each site.
A recent Airdna report found the top 10 Portland hosts renting out just one bedroom collected amounts ranging from $41,564 to $47,468 in the past year. Top hosts renting multiple rooms or full homes, which is common, earned much more.
State compliance question
The short-term rental industry is fairly new here, so it's not clear yet if there's a problem with people not paying income taxes to the state, says Bob Estabrook, state Department of Revenue spokesman. "We're not ready to say this is a problem or this isn't a problem," Estabrook says.
"It's not just the state who's going to care whether you've got income to report from a short-term rental; it's also the IRS who's going to care," he says.
Hosts who rent out their properties at least 15 days a year must report the income to the IRS. Generally that's reported on Schedule E federal tax forms, which Oregon uses to determine taxable income owed to the state.
The Oregon Department of Revenue does not like to divulge its enforcement methods for assuring compliance with its tax rules. But when people have home listings on the internet, or individual ads on Craigslist, it's not too hard to track them down, Estabrook says. And the state has more tools at its disposal than the city to assure compliance.
Mike Liefeld, enforcement program manager for the city Bureau of Development Services, is frustrated by the lack of compliance among Airbnb and other hosts in seeking permits and heeding other city requirements. His bureau received 324 complaints from residents about short-term rentals from September 2014 to September 2016, which Liefeld called a "very high number."
Yet he has never heard any talk that people avoiding permits might be trying to duck income taxes.
"I would be shocked that people would take that amount of risk," he says.
Airbnb enforcement action delayed
On Nov. 10, the city Revenue Division sent a letter to Airbnb demanding the names and addresses of all of its estimated 3,200 Portland hosts. Airbnb, which has strongly resisted sharing that information in the past, was given until Dec. 12 to comply or face a $1.6 million fine — $500 per listing.
But Airbnb asked the city for an extension until Feb. 1, "to prepare a proposal for the city," says Thomas Lannom, Revenue Division director. "We granted their request."