A Guide to Short-Term Rental Taxes in Massachusetts
Owning an income property on Cape Cod, the Islands or anywhere in Massachusetts can be a smart way to build wealth, but navigating Massachusetts’ complex tax and rental landscape is critical to maximizing your income. Whether you’re renting out a beach cottage for the summer or managing a multi-family in Boston, working with a financial advisor who is well-versed in rental properties and the tax code can make a real difference.
Here are some lesser-known tax consequences that many property owners overlook:
1. Evolving Landscape of Massachusetts Short-Term Rental Taxes
Short-Term Rentals Are Subject to Hotel-Like Taxes. Since July 1, 2019, Massachusetts has implemented specific taxes on short-term rentals—defined as rentals of 31 days or less. These taxes are subject to change, with municipalities periodically adjusting rates and implementing new regulations. For instance, towns like Provincetown have adopted the maximum allowable rates, resulting in a combined tax rate of up to 17.75% for short-term rentals.
These taxes include:
State Room Occupancy Excise Tax: A 5.7% state tax applies to short-term rentals.
Local Option Room Occupancy Tax: Cities and towns may impose an additional local tax of up to 6% (6.5% in Boston).
Cape Cod and Islands Water Protection Fund Excise Tax: An additional 2.75% tax is levied in Barnstable, Dukes, and Nantucket counties to fund water protection initiatives.
Community Impact Fee: Municipalities can charge up to 3% on professionally managed short-term rental units, particularly if an operator owns multiple properties within the same town.
2. Rental Property Losses Aren’t Always Deductible
Owning a rental property doesn’t guarantee tax savings, even if you’re operating at a loss. Because rental income is considered passive, the IRS places limitations on how and when you can deduct those losses.
Under IRS rules, rental real estate is typically considered a passive activity, and losses can only be deducted against other passive income unless exceptions apply.
Deductions may be limited if your income exceeds certain thresholds or if you don’t actively participate in managing the property.
Real estate professional status is required for full deduction
3. Thinking of Selling? Consider Capital Gains
Unlike a primary residence, the full capital gain of a secondary or income property is taxable at 15–20%, depending on income level. Massachusetts charges its own 5% state capital gains tax. If you sell quickly, short-term gains could be taxed at even higher ordinary income rates.
4. Depreciation Recapture and 1031 Exchange
Depreciation is a valuable deduction while you own the property, but when you sell, the IRS wants some of it back. That’s called depreciation recapture, and it’s taxed at a rate of up to 25%. Many owners don’t plan for this, leading to a surprise bill at closing.
Thinking of deferring capital gains by reinvesting through a 1031 exchange? Be careful, Massachusetts doesn’t always follow federal rules, especially if you reinvest outside the state. You might still owe state tax even if you defer federal tax. A quality financial advisor who collaborates with your CPA or estate attorney can help you avoid unintended tax liabilities.
Financial Fit Advisors Will Help you Mitigate these Consequences and Incorporate them into your Broader Financial Plan
Given the dynamic nature of these tax laws and the variability across different locations, staying informed and compliant can be challenging. Engaging one of Financial Fit’s knowledgeable financial advisors can provide invaluable assistance in:
Monitoring state and local tax codes that may affect your rental property.
Leveraging Exemptions and Special Considerations including the 14 Day Rule, Augusta Rule and Long term rental rule that can ease the tax burden of an income property.
Ensuring you have the proper insurance and legal protections, such as registering an LLC for your income property.
Developing proactive tax strategies, such as tax loss harvesting, to optimize your rental income and reduce your tax liability.
Help you keep detailed records of income and expenses for tax filing.
Navigating registration requirements, remittance procedures, and other regulatory obligations to avoid penalties.
You Deserve Advice That Fits Your Life
At Financial Fit, we connect you with experienced financial advisors who understand your local tax rules, your financial goals, and your real estate holdings. If you own income property in Massachusetts, let us help you find the right expert to make sure your investments are working as hard as you are.