The vacation rental industry in Colorado mountain towns has been both a blessing and a curse. A blessing for investors and tourists. A curse for local residents.
One aspect of the industry that’s raised questions is a possibly-unfair property tax structure.
Below is a quote from a proposed bill that might be considered by the Colorado General Assembly during the 2024 session, and is reportedly endorsed by the Polis administration. The Legislative Oversight Committee Concerning Tax Policy held a hearing on the proposed bill last week.
The bill establishes that for property tax years commencing on or after January 1, 2026, a short-term rental unit, which is an improvement that is designated and used as a place of residency by a person, family, or families, but that is also leased for overnight lodging for less than 30 consecutive days in exchange for a monetary payment (short-term stay) and is not a primary residence, and the land upon which the improvement is located, may be classified as either residential real property or lodging property. If, during the previous property tax year, a short-term rental unit was leased for short-term stays for more than 90 days then it is classified as lodging property, otherwise it is classified as residential real property. Actual value for a short-term rental unit that is classified as lodging property is to be determined solely by application of the market approach to appraisal.
There are a few interesting details in this proposed bill. For example, the date “January 1, 2026″… the stipulation “is not a primary residence”… the classification “lodging property”… and the “market approach to appraisal”.
One of the unusual aspects to Colorado’s tax system — unusual, that is, compared to surrounding states — concerns the distinctions between various types of land uses, when determining property taxes. Thanks to the Gallagher Amendment, approved by Colorado voters in 1982, commercial properties and vacant properties have been paying a property tax rate that’s approximately four times the rate paid by residential properties. And because the total value of residential properties had been increasing faster than commercial and vacant properties, the Gallagher Amendment had resulted in a steady downward pressure on residential property tax rates. As of 2020, residential property made up 80% of the property value in the state, but was responsible for only 45% of the tax bill.
Back in the 1980s, homeowners paid taxes on about 20% of the value of their homes. That figure — the “residential assessment rate” — had fallen to 7.15% of the appraised value.
Meanwhile, the property tax rate for commercial and vacant property remained at 29%.
Note that the “assessment rate” is not the same as the “appraised value”. Property taxes are calculated based on three key determinants: the assessment rate, the appraised value, and local mill levy rates. While the residential tax rate has been falling since 1982, we’ve seen upward pressure on home values, especially since about 2012.
The voters repealed the Gallagher Amendment in 2020, when they passed Amendment B. That vote froze the maximum residential tax rate at 7.15%, and kept the commercial rate at 29%. Without Amendment B, the assessment rate for residential property would have fallen to about 5.88%.
The Legislative Oversight Committee listened to public testimony last week, reacting to a draft of the new vacation rental taxation bill. More than 75 of the speakers voiced opposition to the proposed law, an indication of the political hurdles the measure faces. According to reporting in the Colorado Sun, the opponents appeared to be mainly Short-Term Rental (STR) owners and management companies.
Colorado legislators have had numerous bills presented, over the past several years, that would affect the taxation or use of residential homes used as motels, but none have been approved. But last year, the legislators got up enough courage to include — as part of Proposition HH — a distinction between residential homes used year round, on the one hand, and on the other, vacation rentals and second homes, which would pay a slightly higher property tax rate.
Legislator support for Proposition HH could seen as an indication that the bill considered last Tuesday by the Oversight Committee Concerning Tax Policy — and supported by the Polis administration — has a chance of passing in 2024.
So the interesting details.
The bill establishes that for property tax years commencing on or after January 1, 2026…
This would give county assessors less than two years to identify which vacation rentals are “commercial uses” and set up a system for tracking the number of days they are rented out. It would also give vacation rental investors time to switch to long-term rentals, or to sell their properties — no doubt, at a reduced value.
…and is not a primary residence…
The proposed bill also states that an ADU (Accessory Dwelling Unit, or guest cottage) used as a vacation rental, while the primary resident lives in the main home, will also be classified as “commercial lodging”.
…a short-term rental unit was leased for short-term stays for more than 90 days then it is classified as lodging property, otherwise it is classified as residential real property...
Thus, an STR rented out in excess of 90 days per year would become a “commercial property” — just like a hotel or motel — and would pay the 29% assessment rate, rather than the 6.765% rate they are currently paying (as the result of last year’s property tax reduction in SB-238.)
Actual value for a short-term rental unit that is classified as lodging property is to be determined solely by application of the market approach to appraisal.
This is an interesting detail. Most commercial properties have their value determined by a mix of factors, including the amount of revenue generated by the property. This is called the “income” method. Residential homes do not typically generate “income” so they are appraised based on the “market approach”… that is, an estimate of how much they would sell for on the open market.
By classifying vacation rentals (STRs) as “lodging” but appraising them using the “market approach” only, the law would subject STRs into a different appraisal method than hotels and motels which are appraised based partly on the amount of income they generate.
For example… an STR that might sell on the open market for $1 million, will be appraised at $1 million.
For comparison, we might look at the Springs Resort here in Pagosa Springs, which sold for $42.5 million in 2018, but is appraised — using a mix of factors — at $12.5 million.