Tax change for short-term rentals threatens livelihoods, owners say

Mar. 23—Cynthia Carter bought a house 11 years ago in the foothills south of Santa Fe, off Old Santa Fe Trail. A few years later, her work as a self-employed graphic designer slowed, so she came up with a plan to convert her two-bedroom home into a short-term rental.

"I spent all of my savings building a smaller dwelling on the property so I could rent out the main house," said Carter, 58, a 25-year resident of the area. She made a slew of repairs to the rental, added a hot tub and pond, became a "superhost" on Airbnb and could afford her more than $2,000-per-month mortgage.

Her fear now: "I'm just going to be taxed out of my home, basically," she said. "It's looking really bad for me."

That's because Santa Fe County Assessor Isaiah Romero is reclassifying some short-term rentals from residential to nonresidential for property tax purposes this year.

The change will more than double some owners' November tax bills, the combined effect of both higher tax rates for nonresidential properties and property valuations rising to market value. A state law caps the yearly increase of residential property valuation at 3%, even if the market value has increased far more.

A Santa Fe resident with a home valued at $300,000 in 2022 would have paid about $900 more in taxes for a nonresidential property valued at the same amount.

In Carter's case, reclassification would increase her taxes from $2,688 in 2023 to $5,788 in 2024. The gap would widen from there. If her property value rose 6% per year — an estimate given to her by a real estate agent — she would pay more than $86,500 in taxes over the next 10 years rather than about $38,000.

Old law, new way to comply

Romero has embarked on reclassifying some short-term rentals because he said they clearly don't fit the definition for residential properties under state law. The law stipulates residential property excludes buildings "used primarily for temporary or transient human habitation such as hotels, motels and similar structures."

That law hasn't changed, but Romero's ability to comply with it has, he said: In 2023, Santa Fe County for the first time followed the city's lead in requiring short-term rentals to obtain business licenses and registrations.

Essentially, "it was difficult to identify" short-term rentals until recently, Romero said.

Last fall, the County Assessor's Office compiled a list of licensed short-term rentals in the city and county and sent questionnaires to rental owners asking about the use of the properties.

For multi-use properties with both residential and nonresidential components, such as short-term rentals where the owner lives on-site, the tax code stipulates assessors either separate the property into discrete parts — which is not possible with Santa Fe County's tech systems, Romero said — or determine the "predominant use" of the property.

His office has used data on nights rented and square footage, as reported by owners in the questionnaire, to determine the predominant use of owner-occupied short-term rentals.

If an on-site owner lives full time in a house larger than a secondary dwelling being rented out, the property will remain classified as residential regardless of the number of nights renters spend in the smaller home.

A property will also remain residential if short-term guests rent out part of the property for less than half the year, regardless of whether the rental home is smaller or larger than the portion lived in by the owner.

A "good amount" of short-term rentals in Santa Fe County are rented out for less than half of the year, Romero said. About 70% of rental owners responded to the questionnaire, and less than 10% of those will be reclassified as nonresidential, he said.

His office will, however, reclassify the properties of the 30% of owners who did not respond to the questionnaire.

"If you do not respond, we have to make the assumption — right? — that is a short-term rental. They have a license, and we are changing the classification," Romero said, noting the office has conducted outreach on the change via social media, the radio and four public meetings where assessors met with taxpayers individually.

Taxpayers who disagree with their property classification can file an appeal with the office online, in person or in writing after they receive their new notice of value May 1.

Generally, property owners receive a notice of value by April 1, but the County Assessor's Office asked the state Property Tax Division for an extension this year to sort through short-term rental changes, Romero said.

'We're trying to have uniformity'

Carter said she feels unreasonably punished for having chosen to live in a smaller dwelling on her property.

"I think people think [short-term rental owners] are super wealthy, and you know, we're not," she said. "I am a working person ... and I'm cash poor, basically.

"If I sold the property, I could pay off all my debt and have a little money left over," she added, "but the thing is, I don't want to sell my property. I'm happy here, you know?"

The county assessor "created these rules himself based on one line of text in New Mexico law," Carter said, echoing a sentiment of other frustrated rental owners.

"I feel strongly, it's just really unfair what they're doing. It's just quietly happening, and it's ruining people's lives," she said.

Carter added, "This basically will put us out of business, and it feels like that's what they're trying to do, is just put us all out of business."

For Romero, there was only one reason for the decision: "However the taxpayer chooses to utilize a property, I have to reflect that use in the classification."

Having to determine predominant use of a property is nothing new for his office, he added. "We utilize that same methodology for other properties, such as multi-use properties in Madrid or on Canyon Road, where you have one property used as a gallery in the front and [home] in the back."

Santa Fe County's methods for classifying short-term rentals are backed by state law and "extensive" conversations with legal counsel and other assessors across the state, county Deputy Assessor Ivan Barry said.

Multiple New Mexico counties have already reclassified short-term rentals as nonresidential properties and in some cases have taxed them as such for years, said Bernalillo County Assessor Damian Lara, who serves as chairperson of the New Mexico Counties Assessors Affiliate.

With the advent of new ways to track short-term rentals, "we're able to enforce the law better," Lara said. "This is not something that we decided to do as county assessors. This is something that has been in state law for many years and other assessors have already implemented this, and ... we're trying to have uniformity across the state."

Lara said he is "very close" to implementing the short-term rental change in Bernalillo County. He's had to delay the change until 2025 only because Bernalillo County does not license short-term rentals, he added, so his office must use a third-party system to identify them.

Romero said his office will use the software company Granicus to audit short-term rental use in the county throughout the year. His office requested a full-time senior appraiser to manage and audit short-term rentals and business personal property for fiscal year 2025, he added.

Tough choices for rental owners

Multiple short-term rental owners in Santa Fe said, at the very least, they need more time to adjust to a change in the tax classification of their properties, which already have reservations booked throughout this year.

"It's not like they're telling us this is what's gonna happen next year. It's like, I have to do something now," rental owner Maggie Lambe said.

Lambe, 61, lives in a 700-square-foot casita in the South Capitol neighborhood behind a 1,200-square-foot home she has used as a short-term rental for six years.

She bought the property about 15 years ago. The County Assessor's Office estimated a tax reclassification would raise her taxes from about $2,500 to $8,000 per year, she said.

She can't afford that increase, which has left her with the choice of either cancelling reservations this year, losing her "superhost" status and flipping which property she lives in or blocking off her rental for half the year and losing out on up to 50% of her rental income, she said.

For now, she has decided to get another job on top of her concierge business "to make it through this year" and hopes the reclassification will be overturned by a lawsuit or change in state law.

"If you live on the property, you should be able to choose which property you live in. I mean, it makes no sense at all to me," Lambe said. "It's not like I'm living in Texas. ... I mean, I rely on my income to pay my bills, and they're taking that away from me."

Carter, likewise, generally hosts guests in her rental about 200 days per year but plans to block it off late this year and lose thousands of dollars in rental income to maintain her residential tax status.

"How is leaving a property vacant for 182 or more days a benefit to anyone?" she wrote in an email.

Elizabeth Emmens, an organizer of a grassroots group of short-term rental owners in the county, said she views the change as a continuation of an "attack on property rights" by the county.

Emmens was among a handful of owners who filed a lawsuit against the county's ordinance regulating rentals in 2023, claiming the regulations constituted government overreach. That lawsuit is ongoing.

Given the soaring cost of housing in Santa Fe, short-term renting is often the way young families afford a home or multigenerational families afford to keep a home, Emmens said.

"Wherever I've lived around the country, my local government never put up roadblocks to homeownership," she said. "Why would you do that here in Santa Fe, when we need young people here?"

Romero emphasized the change boils down to his responsibility to follow the law.

Asked whether he expects litigation over property reclassifications, he said at least one property owner has told him they intend to sue.

"That's just me being honest," Romero said. "We will see."

Emmens declined to comment on whether she plans to file a lawsuit challenging short-term rentals' reclassification.

If people don't agree with the law, they can appeal to lawmakers to change the law, Romero noted. "I would not be in opposition to changes; I'm merely trying to follow statute as written."

He and Barry said all taxpayers should review their notice of value this spring to determine whether they agree with the valuation.

"A lot of times people get it and they go, 'Oh, not a bill' and they throw it away — but it's super important," Barry said.