Recent warmer temperatures may offer some hope that winter is on its way out – perhaps enough to start dreaming of summer vacation.If that dream includes getting away to the beach later this year, you may need to budget a little more. A new state tax on short-term rentals means the price for fun in the sun is a bit higher this year.Contributor Eileen Dallabrida takes a closer look at the beach rental market and the impact of this new tax.
Contributor Eileen Dallabrida examines Delaware's beach rental market and the new tax on short-term rentals
Mary McLaughlin was so pleased with the beach house in Lewes she rented last July that she reserved the house for this year the day she and her family checked out.
Her real estate agent sent the contract to McLaughlin’s home in Wilmington in December and McLaughlin returned the paperwork promptly with a check. Locking up the deal early paid off.
“We could get our deposit recorded before the new 4.5% tax went into effect on Jan. 1,” she says. “So, we have a one-year reprieve on the tax.”
Vacationers to Delaware beaches will pay a little more for their place in the sun this year. The state’s recently enacted tax on short-term rentals will add $45 to every $1,000 charged for a rental property. That’s in addition to local assessments and other fees, such as charges for pets or providing sheets and towels. Add it all up and the tab for a get-away increases significantly.
For example, a three-bedroom, two-bath condominium at the oceanfront Henlopen in Rehoboth Beach rents for $3,995 for the second week of July. After a $115 processing fee, another $115 for a damage waiver, a $206 charge for linens, $279.65 in local Rehoboth tax, and $174.15 in Delaware state tax, the tally comes to $4,884.80. That’s $889.80 above the list price.
There’s a two-week minimum stay at a five-bedroom, five bath house with a pool in the private Indian Beach community in Dewey. The state tax will add $1,080 to the $24,250 rental fee. There’s also a $115 processing fee, $230 damage waiver, and $660 linens fee. The total: $26,335.
Sea Colony in Bethany Beach offers a private beach, indoor and outdoor pools, fitness facilities, and tennis and pickleball courts. But those amenities aren’t included in rent. Vacationers must pay a $55-per-person recreation fee upon arrival.
Short-term rentals are defined as residential properties — such as single-family houses, townhomes, apartments, condominiums, cabins, houseboats and trailers — rented to guests for 31 consecutive nights or less. Guests are responsible for paying the tax. Landlords and third-party entities, such as Airbnb and VRBO, are responsible for collecting the money.
In some locales, rental taxes are increasingly viewed as an important source of revenue. In a unanimous vote, Selbyville Town Council last year amended the town code to impose a 2%-tax on rental income. That includes rooms, rooming houses, boarding houses, bed-and-breakfast inns, cottages, cabins, houses, duplexes and apartments. Stores, garages, warehouses and commercial enterprises that rent or lease space also will be taxed.
“In these small municipalities, there are only so many ways to make money,” says Michael Kogler, who leads the Mike Kogler Team, a boutique beach real estate firm.
Internationally, cities look at short-term rental taxes to boost their budgets. In Japan, the city of Kyoto is increasing its tax, but only on high-end accommodations. The money will support such visitor-focused initiatives as the preservation of historic buildings, public transportation improvements and tourism marketing. In St. Louis, voters overwhelming approved a 3%-rental tax on visitors to fund affordable housing for local residents.
Dewey Beach currently assesses a 3% short-term tax. In Lewes and Ocean View, the local levy is 5%. Rehoboth and Bethany Beach currently have the highest short-term tax at 7%. The rate for Rehoboth hotels is 3%, in addition to the state’s 8%-tax on hotel bills.
Hoteliers have supported a state tax on short-term landlords for years, saying it was unfair for hotels and motels to be assessed while other owners of other lodgings were not.
But pressure from real estate professionals is inspiring some governments to tap the brakes on what has become a flurry of fees. In a 3-2 vote, Sussex County Council turned down a proposed 3%-tax on short-term rentals in unincorporated areas of the county, which represent about half of the county’s rental market. In a December hearing, landlords said the tax would erode the competitive advantage they have over nearby beach communities in Maryland, where lodging taxes range from 5%-8%.
Until Jan. 1, Delaware was one of only three states that did not tax short-term rentals. The other two are Alaska and California, although local municipalities in those states are permitted to enact taxes. Connecticut charges the highest lodging tax at 15% but doesn’t allow local governments to charge additional taxes.
So, what about buying a home in coastal Delaware instead of renting? That’s a pricy proposition, too. Residential real estate prices in Sussex County now far surpass New Castle County, according to the Delaware Association of Realtors. In January, the median home price in Sussex was $465,000. In New Castle, the median home price was $350,000; in Kent County, the median home price was $323,000.
"They are going to say, ‘hey, everything is going is up.’ They are paying a lot of money anyway for their vacations, and this won’t make that much difference."
Real estate agent Michael Kogler says the state's new short-term rental tax hasn’t evoked a strong reaction from consumers, yet.
Kogler says some beach buyers are splitting the difference, living in a home part of the year and renting it during the vacation season. He recently sold a condo to a couple who plan to rent the property 12 weeks a year.
New construction, most in the western part of the county, has pushed up inventory, with 593 new listings in January. For folks who want to live closer to the beach, inventory is tighter. Kogler recently sold a five-bedroom, 4.5-bath home in tony Rehoboth Beach Yacht and Country Club for $1.2 million after only four days on the market.
Some homes never make it to the multi-listings. Kogler points to Bay Crossing, a popular 55-plus development with the allure of being located east of Route 1.
“There’s a lot of word-of-mouth in the community and many of the homes are sold privately,” he says.
Kogler says the market isn’t as competitive as it was during the pandemic, when buyers flocked to Sussex County in search of a quiet place to hunker down and self-isolate. That might be due, in part, to mortgage interest rates, which are more than double the 3%-rate borrowers enjoyed at the height of the sellers’ market.
So far, the new short-term rental tax hasn’t evoked a strong reaction from consumers, who are focused on more immediate concerns like the soaring price of eggs.
“They are going to say, ‘hey, everything is going is up.’ They are paying a lot of money anyway for their vacations, and this won’t make that much difference,” he says.