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Airbnb Rules in Illinois: Laws, Taxes, and Regulations

Airbnb Rules in Illinois: Laws, Taxes, and Regulations

As the Airbnb market continues to expand in Illinois, understanding the complex tapestry of state and local regulations is crucial for anyone looking to start or manage a short-term rental property. 

In today’s blog, we will delve into Illinois’ definition of a short-term rental, explore the nuances of specific rules and outline the critical requirements for starting and operating a successful Airbnb venture.

 Discover the Prairie State in the Heart of the Midwest

Illinois, fondly known as “the Prairie State of the Midwest”, is a state in the Midwestern region of the United States.

Illinois is an ideal destination, known for its rich cultural attractions and excellent shopping, making it an enjoyable visit any time of year. Chicago, the state's most popular city, attracts global tourists with its top-tier retail, dining, museums and architectural wonders by famed architects like Frank Lloyd Wright and Louis Sullivan. 

The state capital, Springfield, draws visitors with attractions like the Abraham Lincoln Presidential Library and Museum. Illinois also features unique sites such as the prehistoric Cahokia Mounds and Rockford’s tranquil Anderson Japanese Gardens. With over 110 million visitors annually, Illinois offers property managers and hosts numerous opportunities in a thriving tourist economy.

 How is a Short-Term Rental Defined in Illinois?

In Illinois, a short-term rental is legally defined as any rental of a residential dwelling unit for a period of 31 days or less. 

 Entire home rentals

Renting out an entire residential unit without the owner present.

 Private or shared room rentals

Offering a room within the owner’s primary residence.

 Accessory dwelling unit (ADU) rentals

Such as guest houses or mother-in-law suites.

 Vacation rental homes

Often larger properties in resort areas.

These short-term arrangements are distinguished from longer-term leases by the 31-day cutoff, which triggers different regulatory considerations.

 Starting a Short-Term Rental Business in Illinois

 Registration and licensing

If you're planning to rent out two or more units in a building that has at least four units, such as condos or apartment buildings, you'll need a license from the Illinois Department of Public Health. 

However, if you're just renting space in your own home for up to 30 consecutive days, you won't need a license, but you will need to register with the state. Getting a license involves submitting an application, paying a fee, passing an inspection and renewing your license periodically.

 Local permitting and approvals

Many places in Illinois require you to get a local short-term rental permit. You'll need to provide some basic information about yourself and your property, pay an annual fee, confirm your property meets safety standards and keep the number of guests within set limits.

 What you need to know before you start

Understanding and complying with all relevant laws from the start is imperative. Make sure you have the necessary state and local licenses or permits. It's wise to get expert advice on legal, tax and insurance matters. 

Set up clear rental agreements and house rules, get the right insurance and consider adding smart home technology for better management. Also, be proactive in dealing with any concerns from neighbors.

 Inspections required

 In Illinois, running a short-term rental means your property will need to pass several inspections

- State licensing inspections by the Department of Public Health.

- Local safety inspections for obtaining short-term rental permits.

- Regular fire safety inspections according to local regulations.

- Inspections after any significant renovations to ensure everything is up to code.

 Required paperwork

You’ll need to handle a variety of documents, including the following 

  • Applications for registration and licensing

  • Applications for local permits

  • Rental contracts and house rules

  • Insurance policies

  • Tax records

 Short-Term Rental Licensing Requirement in Illinois

For anyone renting out two or more units in larger buildings, obtaining a license from the Department of Public Health is mandatory. This process includes a formal application, associated fees, inspections and regular renewals. Failing to comply can lead to fines.

Local governments may also require you to obtain permits for your rental properties. This involves providing contact details and information about your property, paying fees, certifying that your property meets safety standards and adhering to guest limits.

Both state and local regulations impose limits on how many people can stay in your rental property, both overnight and during the day.

 Homeowner Association Requirements 

In Illinois, homeowners associations (HOAs) may also have specific rules regarding vacation rentals. As a member, you should familiarize yourself with the association's policies. Reviewing this information to learn about any restrictions or limitations on short-term vacation rentals is important.

Other regulations associated with leases/subletting or condo/co-op rules may apply to your situation. Reviewing your signed lease and speaking with your landlord or property manager is a good place to start.

 Short-Term Rental Tax in Illinois 

In the event that you have registered with tax authorities, you will be able to collect the rental tax, which will be added to the guest's bill.

If you collect payment from short-term guests renting out a room, apartment, house or other dwelling, you’re likely responsible for collecting, filing, and remitting short-term rental taxes to Illinois tax authorities. 

Short-term rental tax compliance depends heavily on the location of your rental. Depending on your address, you're required to report to which tax jurisdictions, which taxes you're required to collect, and which tax rates apply.

 Registering with state tax authorities

Before you can begin collecting taxes on your short-term rental in Illinois, you’re legally required to register with the Illinois Department of Revenue

You can register online and receive a certificate of registration, taxpayer ID and instructions on filing your lodging taxes. Local tax authority registration may also be required.

 Side note: 

In Illinois, you don’t need to form an LLC to register with tax authorities.

 Taxes applicable to Illinois Short-Term Rentals

You may have to pay a number of different lodging taxes in Illinois depending on the location of your short-term rental property. 

The following tax remittances should be filed and remitted to the Illinois Department of Revenue

  1.  Illinois Hotel Operators’ Occupation Tax

5.98-6.17% of the listing price including any cleaning fee for reservations 29 nights and shorter. Guests who book via Airbnb and are located in the State of Illinois will pay this tax as part of their reservation.

  1.  Illinois Sports Facilities Hotel Tax (Chicago)

5.73% of the listing price including any cleaning fee for reservations 29 nights and shorter. Guests who book via Airbnb and are located in the State of Illinois will pay this tax as part of their reservation. 

  1.  Metropolitan Pier and Exposition Authority Hotel Tax (Chicago)

The tax is filed using Form RHM-1, Hotel Operators' Occupation Tax Return, which includes the tax rate if applicable. The filing deadline aligns with that of the Hotel Operators’ Occupation Tax. For more details, refer to "Hotel Operators’ Occupation Taxes."

  1.  Municipal Hotel Tax (Chicago)

Depending on the property's location, county or city lodging taxes must be filed and remitted to the local tax authority. 

 Tax Rates

Before collecting taxes on short-term rentals, ensure you know the current rates as they often change. Having accurate rates helps avoid overcharging or undercharging guests. Tax rates, guest registration protocols, filing frequency and the minimum rental duration required for a taxable stay will vary based on your location in Illinois.

To view the complete list of Illinois tax rates, click here.

 What charges are taxable?

  1. In Illinois, anything the host requires the guest to pay in order to use the accommodation is considered part of the rental fee. This includes items such as cleaning fees, pet fees, rollaway bed fees, extra person fees, etc.

  1. Fees for optional laundry services or food and beverage purchases aren’t subject to lodging taxes. However, they may be subject to sales taxes.

  1. Before collecting any short-term rental taxes from your guests, you need to be aware of whether any taxes have already been collected for you. When you list your property on Airbnb, these taxes are collected on behalf of you when a listing is booked. In the case it is not collected you as the host are responsible to collect and remit state taxes to the state. 

Each year, OTAs add new jurisdictions to the list of locations where they collect lodging taxes on behalf of hosts. Check with your OTA to determine what taxes they collect in your jurisdiction.

 Exempt Taxes for Guests

In Illinois, there are situations where lodging taxes do not have to be collected. Short-term lodging taxes will not apply to a guest renting for the long-term rather than a short-term period. 

Also note that in Illinois, foreign diplomats are exempt from the Hotel Operators' Occupation Tax.

 Filing short-term rental tax returns

The Illinois Department of Revenue needs to receive your tax returns after you have collected taxes from your guests. In Illinois, you can file your returns online. You will need to enter details about how much you charge for your rentals in order to file.  Additionally, you must pay the tax amount due. 

 Side note

Be sure to double-check your returns before submitting them. Typos, missing signatures and incorrect tax information can all lead to delays.

 Filing tax returns

You’ll be assigned a filing frequency and due dates when you register with the tax authority. For filing with the Illinois Department of Revenue, due dates are as follows:

Monthly Due the last day of the month following the close of the filing period

Annually Due by January 31 each year

 Special note : 

Whether or not short-term rental income was earned or short-term rental taxes were collected, short-term rental operators are required to file returns with the Illinois Department of Revenue each assigned filing period. Local tax authorities may have their own requirements for such returns. They are commonly known as "zero dollar returns."

 Are there penalties for filing taxes late?

You may be liable for state and local taxes if you offer short-term rentals on a marketplace like Airbnb or directly to consumers. Taxes are an important source of funding for local governments, so tax authorities are becoming more aggressive in identifying those who do not comply with tax laws. Tax authorities in Illinois may impose fines and interest payments if you fail to register with them and fail to file your short-term rental tax returns on time.

 Illinois Voluntary Disclosure Agreement (VDA) 

Hosts of short-term rentals in Illinois may be able to take advantage of a voluntary disclosure agreement (VDA). By entering into a binding agreement with the Illinois Department of Revenue, hosts have the opportunity to disclose prior period tax liabilities proactively. VDAs are offered to encourage cooperation with state tax laws and may result in some or all penalties and interest payments being waived.

Navigating Success: Final Thoughts on Illinois Airbnb Regulations

The growing Airbnb market in Illinois presents substantial opportunities for hosts and property managers. By fully understanding and complying with state and local regulations, as well as tax obligations, you can run a successful and profitable short-term rental business. Success in this competitive market hinges on being well-informed and compliant, whether you're a new host or a seasoned property manager.

FAQ’s 

1. What defines a short-term rental in Illinois?

   A short-term rental in Illinois is defined as the rental of a residential dwelling unit or a portion thereof (such as a room or guest house) for a period of 31 days or less. This includes entire home rentals, private or shared room rentals, and accessory dwelling unit rentals, commonly found in vacation or resort areas.

2. What are the licensing requirements for starting a short-term rental in Illinois?

   If you plan to rent out two or more units in a building with four or more units, you will need to obtain a license from the Illinois Department of Public Health. For smaller operations, such as renting space in your own home, registration with the state is required but a full license is not needed unless you exceed 30 consecutive days of rental.

3. Are specific local permits needed to operate a short-term rental in Illinois?

   Yes, many local jurisdictions in Illinois require short-term rental operators to obtain a specific permit. This involves providing details about the property, paying an annual fee, and ensuring the property meets local safety standards. The specifics can vary by location, so it's important to check with local authorities.

4. What taxes must be collected and remitted by short-term rental hosts in Illinois?

   Hosts are responsible for collecting several taxes, including the Illinois Hotel Operators’ Occupation Tax, potentially local city or county lodging taxes, and, in specific areas like Chicago, additional taxes such as the Illinois Sports Facilities Hotel Tax and the Metropolitan Pier and Exposition Authority Hotel Tax. Registration with the Illinois Department of Revenue is required to legally collect these taxes.

5. What are the consequences of not complying with short-term rental regulations in Illinois?

   Non-compliance with state or local regulations can result in fines, the need to cease operations, or other penalties. Additionally, if taxes are not properly collected and remitted, the Illinois Department of Revenue may impose fines and interest payments. Hosts can also use a Voluntary Disclosure Agreement to address past non-compliance proactively with potentially reduced penalties.

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