Please keep in mind that I am not an attorney or an accountant, this is just my interpretation of the law as written. This should not be considered legal or accounting advice and you should consult a lawyer or accountant before making any decisions on your property.
There’s been a great deal of confusion over the recent change to the NJ taxes on rental properties. It is a little complicated because everything is amending or modifying existing laws so there are a lot of references to those laws. The actual “tax” part isn’t even included in the newly signed law because that is part of a prior law that implemented the occupancy and sales tax.
22. Section 1 of P.L.2003, c.114 (C.54:32D-1) is amended to read as follows:
1. a. In addition to any other tax, assessment or use fee authorized by law, there is imposed and shall be paid a hotel and motel occupancy fee of 7% for occupancies on and after August 1, 2003 but before July 1, 2004, and of 5% for occupancies on and after July 1, 2004, upon the rent for every occupancy of a room or rooms in a hotel or transient accommodation subject to taxation pursuant to subsection (d) of section 3 of P.L.1966, c.30 (C:54:32B-3),…….(edited)
and
20. Section 3 of P.L.1966, c.30 (C.54:32B-3) is amended to read as follows:
3. There is imposed and there shall be paid a tax of 7% on or before December 31, 2016, 6.875% on and after January 1, 2017 but before January 1, 2018, and 6.625% on and after January 1, 2018 upon:
…..(d) The rent for every occupancy of a room or rooms in a hotel or transient accommodation in this State, except that the tax shall not be imposed upon a permanent resident.
…..
Above are the sections of the existing law that imposes the two taxes. The first imposes the 5% occupancy tax on “transient accommodations” and the second imposes the 6.625% sales tax on “transient accommodations”
“Transient space marketplace” means a marketplace or travel agency through which a person may offer transient accommodations to customers and through which customers may arrange for occupancies of transient accommodations. “Transient space marketplace” does not include a marketplace or travel agency that exclusively offers transient accommodations in the State owned by the owner of the marketplace or travel agency.
“Obtained through a transient space marketplace” means that payment for the accommodation is made through a means provided by the marketplace or travel agency, either directly or indirectly, regardless of which person or entity receives the payment, and where the contracting for the accommodation is made through the marketplace or travel agency.
As the existing laws impose those taxes on ‘transient accommodations’, the definition of what constitutes a ‘transient accommodation’ is what matters. I’ll try to simplify the newly passed law and how it applies here. First, they define or re-define the terms they use. When something is removed from existing law they put that language in [brackets] and when it is newly added they underline it. I’ll leave the original text at the bottom, but edited it for ease of understanding.
The first two sections above define a “transient space marketplace” and what it means to “obtain” a rental through a transient space marketplace (basically AirBnB, VRBO or a travel agent). To be taxable, the service must process the payment AND coordinate the contract. This definition differentiates a site like VRBO from a site like Facebook, Craigslist, VRBLI, or ShoreSummerRentals. The second sentence about a marketplace owned by the owner of the accommodation is a complicated way of saying that a property owner can have their own website offering their home for rent, and they can collect payments and contract the rental online without being considered a “transient space marketplace” and thus being taxable.
“Professionally managed unit” means a room, group of rooms, or other living or sleeping space for the lodging of occupants in the State, that is offered for rent as a rental unit that does not share any living or sleeping space with any other rental unit, and that is directly or indirectly owned or controlled by a person offering for rent two or more other units during the calendar year.
This is the section that defines a “professionally managed unit”. The wording is very convoluted. Basically it says that if a person owns or controls a rental unit (1) AND owns or controls two or more OTHER rental units (so 3 or more in NJ total), then all of the units are considered “professionally managed”. It’s a really roundabout way of saying that if you own and rent out 3 or more short term units, they are all taxable. There’s a lot of grey area here, so we will need to wait for Treasury to release their interpretation and guidance, but that is how I read it.
“Transient accommodation” means a room, group of rooms, or other living or sleeping space for the lodging of occupants, including but not limited to residences or buildings used as residences, that is obtained through a transient space marketplace or is a professionally managed unit. “Transient accommodation” does not include: a hotel or hotel room; a room, group of rooms, or other living or sleeping space used as a place of assembly; a dormitory or other similar residential facility of an elementary or secondary school or a college or university; a hospital, nursing home, or other similar residential facility of a provider of services for the care, support and treatment of individuals that is licensed by the State; a campsite, cabin, lean-to, or other similar residential facility of a campground or an adult or youth camp; a furnished or unfurnished private residential property, including but not limited to condominiums, bungalows, single-family homes and similar living units, where no maid service, room service, linen changing service or other common hotel services are made available by the lessor and where the keys to the furnished or unfurnished private residential property, whether a physical key, access to a keyless locking mechanism, or other means of physical ingress to the furnished or unfurnished private residential property, are provided to the lessee at the location of an offsite real estate broker licensed by the New Jersey Real Estate Commission pursuant to R.S.45:15-1 et seq. ; or leases of real property with a term of at least 90 consecutive days.
This is just the definition of a transient accommodation. Little is changed from the original law. The most important change is in bold and underlined. This is critical because “transient accommodations” are what the law taxes (as noted in the beginning). So to be exempt from the tax, this definition must exclude your rental. This definition says that rentals are transient accommodations (and thus taxed) IF they are obtained through a transient space marketplace (as defined above) or are professionally managed units (as defined above). The rest of the paragraph clarifies what else is NOT a transient accommodation and thus what is also exempt from the tax (including Realtor rentals and rentals of 90 days or more).
I hope this helps to clarify the laws as they now stand. Feel free to post questions below. Any attacks on politicians or unnecessary comments will be removed. Please keep things civil.
If you’d like to read the new law as it appears unedited… I’ve posted it here.
21 Comments
Brad
Wouldn’t a real estate person be “Professionally Managing Units”? Before they were exempt. Now it looks like they got hit.
Tim Krug
No. It is just a term they created. It has nothing to do with whether there is a “professional” property manager or what the profession of the person handling the rentals is. It is solely determined by whether the owner has 3 or more units for rent. If a person owns and rents 3 or more units in NJ, their units are considered “professionally managed units”. Basically the goal was to exempt “mom and pop” type owners. People that own one or two places at the shore and rent them out to pay the bills. The “limit” was created to try to prevent “professional investors” who own multiple units from avoiding the tax. Realtor managed transactions will continue to be exempt.
Denise Lipman
Why would guests acquired through advertising with Shorevacationrentals not have to pay the tax but VRBO and Homeaway would have to pay?
Tim Krug
That is a question for the legislators who proposed this change. They had to draw a line somewhere and that is what they came up with as a distinction. If the site collects the payments and handles the contracting – taxed. If the site just puts owners and renters in touch and is otherwise not involved – not taxed.
Carmen
Hi, This was very helpful, but I own a shore house that I rent out about 7 weeks every year. This would be “transient” I also have several year-round homes that I rent. Would I fall under the “professionally managed” units? Or no, because only one is “transient” or under 90 days?
So confusing!
Thank you!
Tim Krug
The way I read it, the tax only applies to transient rentals and the unit limit only considers transient rentals as part of the total. But until treasury releases their interpretation / guidance there’s no way to be certain.
Ron
We have 4 units but only rent 3 for weekly summer rentals.
and keep one open for personal use. If we did one year around rental and two summer weekly rentals would we be exempt from the tax.
Tim Krug
There are still a lot of questions to be answered. We are waiting on Treasury to clarify a number of scenarios like the one you mentioned. “I” think that you are correct in your assumption that you should be able to rent one long term (anything 90 days or more), two weekly and use one personally. But, that is ultimately up to Treasury to determine not me. We shall hopefully get guidance from them in the coming weeks.
Juli
Question regarding your comment “If a person owns and rents 3 or more units in NJ.” I do not see language that limits the ownership to just NJ units. What if I own 2 in Delaware and subsequently purchase one in NJ? Would that trip me into having “professionally managed” units?
Tim Krug
I believe that the phrase “in the state” implies that it only relates to NJ property. We won’t know for sure until Treasury releases their guidance.
Pat
The site where we list our condo does not handle the transactions. It lists our email address and prospective renters contact us from that point onward, book their rental and pay us directly. Our original understanding was simply since we listed our condo on such a site, we were subject to pay the shore taxes, so we registered with the State and collected taxes from all our renters this past summer. Many renters are return customers and contact us directly now, do not go through the site at all, but we still collected taxes due to the confusion. Were we misguided, can we return the taxes to our customers instead of paying the State?
Tim Krug
No, you did the right thing. Those transactions were all taxable from 10/1/2018 until the Governor signed the new law 8/9/2019. ALL rentals during that time, regardless of where they were booked or paid were taxable with the sole exception being those processed through a Realtor. You were correct to charge the tax and file with the state. Only nights spent from 8/9/2019 forward are now exempt for those direct rentals or rentals listed through the site (as long as it doesn’t handle payments etc). If you had guests stay from 8/3-8/10, technically I think you can refund them the night of 8/9’s taxes (or 1/7th of the taxes they paid). Anyone who checked in after 8/9 would be exempt and you can refund those guests assuming you own 2 or fewer rental units.
KP
If the rental properties are owned by an LLC (three properties, owned by three separate LLCs), do you think that ownership by the LLC would be the guideline as to whether more than 2 units are owned and thus taxable?
Or, does the fact that I own all the LLCs still make the 3 properties all taxable.?
Thanks!
Tim Krug
Well, I’m just some guy…and my opinion is worth what you paid for it….but here’s my zero cents.
Because of the way the law was worded, I believe that your rentals would be taxable. The reason I say that is because of the phrase they included “directly or indirectly owned or controlled by a person…”. Since you own and control the LLC’s you indirectly own and control the properties held by the LLCs. I think they did this intentionally for that exact purpose.
That being said….if a spouse or partner owned or controlled one LLC and you owned and controlled the others…I would argue that each “person” owns 2 or fewer and thus the rentals would be exempt.
Again, this is just my non-attorney, non-accountant opinion. I’d speak to a professional and run that idea and the language of the law by them and see if they agree.
Good Luck.
Tim
Alex
Does anyone have any information on where to register and how and where to send the collected fees and taxes?
Tim Krug
It is all spelled out in this post: https://www.beachhaven7.com/nj-taxes-registering-filing-paying/
Evalyse Pallante
Hi Tim!
Thank you for this helpful article. I just have a question regarding taxes we’ve collected. We registered with NJ.Gov and called via phone to see how to go about paying the tax. The woman working wasn’t quit sure and not very helpful. I spoke with Duane and he went through a realtor, suggested I reach out to you as you might know. Thank you in advance!
-Evalyse Pallante
Tim Krug
It is all here…. https://www.beachhaven7.com/nj-taxes-registering-filing-paying/
You have to file and pay online.
JOhn Fote
Tim, we own 2 duplexes which are 4 units total. Is there a way that my wife owns 2 and I can own 2 to avoid Professional Managed. They are separate buildings, each with an upper and lower floor. Thanks, John
Tim Krug
John,
With the usual disclaimer that I am not an attorney or accountant….and that you should consult one or both of those…
The law says properties owned or controlled…by a person. Therefore in my interpretation, if duplex A is titled to one spouse, and that spouse handles all the rentals and income independently…. and duplex B is titled to the other spouse, and that spouse handles all the rentals and income independently… I would argue that each PERSON owns and controls two units, thus none of their rentals should be taxable. The people at Treasury might disagree, but that’s how it reads.
James Ward
Did the treasury ever offer an interpretation on this?