Illinois hosts some of the top locations for starting a profitable Airbnb business. However, before venturing into this exciting endeavor, investors need to check out Illinois short term rental laws. In Illinois, vacation rentals are governed and regulated by a set of state-, county-, and city-level rules that owners need to be familiar with. This article outlines the state-level laws before diving into the rules in some of the hottest Airbnb markets in the state.
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Illinois’ Definition of a Short Term Rental
The State of Illinois enacted House Bill 2919 (HB2919) to regulate the local short term rental industry.
The Bill defines a short term rental, including a vacation rental, as a residential unit rented out for a fee for less than 30 consecutive days.
Eligible properties of Illinois House Bill 2919 include:
- Single family dwellings
- Residential dwelling units in a multi-unit structure, condominium, cooperative, timeshare, or joint property ownership arrangement
The definition under Illinois House Bill 2919 excludes:
- Units that are used for non-residential purposes
- Bed and breakfast establishments
- Transient accommodations that are not classified as residential property for real property taxation purposes
This definition is applied throughout Illinois, while some cities might use a slight variation of it within its local regulations.
Starting a Short Term Rental Business in Illinois
The process of launching an Airbnb business in the State of Illinois varies widely based on the specific location. While state-level requirements are few, some Illinois markets have very demanding regulations and procedures.
In general, Illinois Airbnb hosts and operators need to obtain a combination of the following:
- Business registration: In many cities, short term rental owners or operators need to register their business. They don’t have to establish an LLC for this purpose.
- Licensing and permitting: Most Illinois cities require vacation rentals to get an annual license or permit in order to operate legally. In most cases, applications can be submitted online, and the application fee is a few hundred dollars. Licenses need to be renewed annually.
- Required paperwork: Applying for a license usually requires the submission of a number of documents that include the property address, the property size and number of rooms, the owner’s information, the Airbnb manager’s information, proof of ownership, proof of insurance, and others.
- Tax registration: You need to register with the Illinois Department of Revenue (IDOR) and potentially local authorities to pay relevant hotel occupancy and sales taxes.
- Insurance: Some cities demand from vacation rental operators to have both a homeowners insurance and a general liability coverage, which can usually be combined into a short term rental insurance.
- Zoning: In many markets, there are strict zoning restrictions applying to short term rentals. This means that they are allowed in some zones and not allowed in others.
- Safety measures: In most locations, Airbnb properties have to be occupied by no more than a certain number of people per square footage. Moreover, they need to have smoke alarms, carbon monoxide detectors, and fire extinguishers.
- Inspections: In some markets, local authorities inspect short term rentals on an annual basis to confirm compliance with safety regulations.
- Best practices for starting an Illinois short term rental business: You need to conduct thorough research on county and city regulations in your specific market. You can check out local government websites. It’s also recommended to consult with a legal expert to be on the safe side.
Before you list your property for rent, you need to make sure that you have fulfilled all state and local requirements for starting a vacation rental business in your Illinois market.
Short Term Rental Licensing Requirements in Illinois
The State of Illinois does not have state-wide licensing or permitting requirements for short term rentals.
However, most Illinois cities have their own regulations in this regard. Usually short term rental license applications need to be submitted by the owner and to provide detailed information about the property, the address and zoning, the owner, the property manager, and more.
Most licenses are valid for a year and need to be renewed afterwards. Hosts need to pay a fee for each renewal.
Operating a vacation rental without a license is subject to hefty fines.
Illinois Short Term Rental Tax
The taxing of short term rentals in the State of Illinois is governed by Senate Bill 2564 (SB2564) that creates the Short Term Rental Occupation Tax Act.
According to this Bill, two taxes are to be imposed on Illinois short term rental operator that together make the Hotel Operators' Occupation Tax:
- Tax equivalent to 5% of 94% of gross rental receipts from short term rental transactions
- Additional tax equivalent to 1% of 94% of of gross rental receipts from short term rental transactions
Short term rental platforms, such as Airbnb, Vrbo, Booking.com, and others, are obliged to apply, calculate, collect, and remit taxes imposed on the owner or the renter of vacation rentals in Illinois.
Similar to other regulations, Illinois Airbnb taxes vary by city, so hosts need to check out local requirements to be legally compliant.
Some taxes that might apply to Illinois Airbnb hosts in various locations include:
- Hotel Operators' Occupation Tax to be filed and remitted to the Illinois Department of Revenue, equivalent to 6% of 94% of gross receipts (as outlined above)
- Illinois Sports Facilities Authority Hotel Operator's Tax (applicable to Chicago) to be filed and remitted to the Illinois Department of Revenue, equivalent to 2% of 98% of gross receipts
- Metropolitan Pier and Exposition Authority (MPEA) Hotel Tax (applicable to Chicago) to be filed and remitted to the Illinois Department of Revenue, equivalent to 2.5% of gross receipts
- Municipal Hotel Tax (applicable to Chicago) to be filed and remitted to the Illinois Department of Revenue, equivalent to 1% of 99% of gross receipts
- Local lodging taxes that apply to Illinois short term rentals in different cities and vary by rate
- Rental income tax including federal, state, and local rates
- Property tax including county and municipal rates
The Hotel Operators’ Occupation Tax Return, Form RHM-1, needs to be filed on a monthly, quarterly, or annual basis, depending on the taxpayer’s average monthly liability. Taxpayers with an annual liability of $20,000 or more have to remit tax payments via an electronic payment method.
When operating a vacation rental business in Illinois, owners can deduct certain business-related expenses to reduce their taxable income.
These Illinois short term rental business expenses can include:
- Real estate property depreciation (it’s recommended to conduct a short term rental cost segregation survey to maximize benefits)
- Mortgage interest
- Mortgage insurance premium
- Property insurance and Airbnb insurance
- Property taxes
- Marketing and advertising costs
- Short term rental management fees
- Cleaning and maintenance fees
- Accounting, legal, and other professional services
- Furniture, appliances, and guest supplies
- Utility bills
- Home office expenses
- Business travel expenses
It’s crucial for Illinois Airbnb operators to understand all federal, state, and local taxes that apply to their business operations in order to pay them on time and in full. It’s also important to be aware of the deductibles listed above in order to maximize tax benefits and optimize cash flow.
Short Term Rental Laws by Illinois City
In addition to state-level laws, county and city rules also govern vacation rentals in Illinois. HB2919 prevents units of local government throughout the State of Illinois from enforcing regulations that prohibit short term rentals or restrict them based on classification, use, or occupancy.
Local governments may only enact ordinances that aim to protect public health and safety. Moreover, they can apply sales taxes and fees at the same rate as applied to commercial transient lodgings, such as hotels.
Following are the short term rental regulations in some of the best cities for Airbnb in Illinois:
1. Lemont, Illinois Short Term Rental Laws
Similar to the State of Illinois, the Village of Lemont defines a short term rental as a dwelling or a part of a dwelling that is used for accommodations or lodging of guests that pay a fee or other compensation for a period of less than 30 consecutive days.
The Lemont short term rental regulations are very vague. Vacation rentals are only allowed in the D-D (Downtown District) according to Lemont zoning regulations. Moreover, they require a special use permit. Obtaining a special use permit requires a public hearing from the Planning and Zoning Commission, and an application with supporting documents has to be submitted.
To be given this status, a property needs to prove that it is deemed necessary for public convenience in this location and that it is designed and operated in a way that protects public health, safety, and welfare. In other words, registering a Lemont Airbnb rental is not an easy process.
While there are no specific local rules on various aspects of running a short term rental business, hosts need to confirm general safety requirements such as having smoke alarms, carbon monoxide detectors, and fire extinguishers.
Parking should be provided for guests without disturbing public order. Sales tax needs to be paid at a minimum combined rate of 10%. Vacation rental insurance must be obtained.
In brief, Lemont vacation rental laws limit these business operations to one zone only.
2. Chicago, Illinois Short Term Rental Laws
In the City of Chicago, short term rentals are legally referred to as vacation rentals. According to the Municipal Code of Chicago, a vacation rental is defined as a dwelling unit that contains up to 6 sleeping rooms available for rent or for hire for transient occupancy by guests.
Single-room occupancy buildings, bed and breakfast establishments, hotels, dwelling units with month–to-month rental agreements, corporate housing, guest suites, and shared housing units are excluded from the definition.
In general, single family homes and buildings with 2-4 units can be operated as short term rentals only if they are the primary residence of the owner. Some rare exceptions might apply. This does not apply to buildings with 5+ units.
All owners need to apply for a regulated business license by submitting the following:
- A statement of the property type and whether it is the primary residence of the owner
- A statement with the address of the building, the location of the vacation rental within the building, the total number of sleeping rooms, and the owner
- The name, address, and contact information of a local contact person
- An affidavit attesting that the local contact person is designated for service of process, is authorized to take remedial action, and maintains a residence or office in Chicago
- An attestation that the vacation rental is a lawfully established dwelling unit with 6 or fewer sleeping rooms
- An attestation that the HOA has not adopted bylaws prohibiting the use of the dwelling unit as a vacation rental or a shared housing unit, if applicable
- An attestation that the owner of the building does not prohibit the use of the dwelling unit as a vacation rental or a shared housing unit if it is located in a rental building
- An attestation that the dwelling unit is the applicant’s primary residence if it is a single family home
- An attestation that the dwelling unit is the applicant’s primary residence and is the only unit that will be used as a vacation rental or a shared housing unit if located in a building with 2-4 dwelling units
- An attestation that there are no more than 6 dwelling units or one quarter of the total number of dwelling units in the building used as vacation rentals if located in a building with 5+ dwelling units
- A statement whether over the last 2 years the applicant has had a license for a vacation rental or another shared housing unit suspended or revoked
- Proof of insurance including homeowner’s fire, hazard, and liability insurance ad commercial general liability insurance of no less than $1,000,000
- A statement whether the applicant held a valid vacation rental license for the unit as of June 22, 2016
Licenses need to be renewed annually. The license application fee is $250.
In the City of Chicago, no more than 6 dwelling units or one quarter of the total number of dwelling units in a building can be operated as vacation rentals. Moreover, each dwelling unit requires its own license. The license number needs to be present in listings on homesharing platforms like Airbnb and other forms of advertising.
In terms of maximum occupancy, there cannot be more than one guest per 125 feet of floor area.
Moreover, Chicago short term rentals need to provide guests with soap, clean individual bath cloths and towels, and clean linen. The vacation rental as well as dishes, utensils, pots, pans, and other cooking utensils have to be cleaned and sanitized between guests. Food, beverages, and alcohol left by previous guests should be disposed of. In case food is offered to guests, it has to comply with all applicable food handling and licensing requirements.
In addition, Airbnb properties must be in compliance with applicable laws regarding the installation and maintenance of functioning smoke and carbon monoxide detectors.
Chicago Airbnb hosts need to pay a total city tax rate of 10.5% of gross rent including:
- Chicago Hotel Accommodation Tax equivalent to 4.5% of the listing price including any cleaning fees and guest fees
- Chicago Vacation Rental and Shared Housing Surcharge equivalent to 4% of the listing price including any cleaning fees and guest fees
- Domestic Violence Surcharge equivalent to 2% of the listing price including any cleaning fees and guest fees
Violations of any of these regulations and requirements can lead to hefty fines ($1,500-$3,000 per offense), revoked licenses, or injunction or other equitable relief in court.
To sum, similar to other major cities in the US, Chicago generally prohibits non-owner occupied short term rentals.
3. Aurora, Illinois Short Term Rental Laws
In the City of Aurora, IL, short term rentals are governed by the same general rules as long term rentals. The applicable regulations aim to protect the safety of guests.
The Aurora rental property requirements focus on:
- Rental licensing: A rental license needs to be obtained. Licensed dwelling premises have to provide off street parking and a minimum amount of landscaping. Interior and exterior inspections are conducted on non-owned occupied units on an annual basis.
- Occupancy standards: In terms of sleeping space, one guest requires a minimum of 70 square feet, 2 guests - a minimum of 100 sq ft, 5 guests - a minimum of 250 sq ft, and 10 guests - a minimum of 600 sq ft.
- Carbon monoxide detectors: A carbon monoxide detector has to be installed within 15 feet of all sleeping rooms.
- Heating requirements: Owners need to provide adequate heat between September 23rd and May 5th of each year.
The hotel occupancy tax in Aurora, Illinois is 3% of the rental rate.
To conclude, like other small cities, Aurora does not have detailed short term rental rules.
4. Naperville, Illinois Short Term Rental Laws
The City of Naperville defines a short term residential rental as a residential structure that is offered for rent for a period of no more than 30 consecutive days excluding hotels, bed and breakfast establishments, and boarding facilities.
Ordinance No. 20-087 made it illegal for any person or entity to operate a short term residential rental as of October 20th, 2020. This drastic move was made in an attempt to protect public health, safety, morals, and safety in Naperville after the significant negative impact of vacation rentals on neighboring properties and their residents. Thus, Naperville claims that this is in line with the wider Illinois short term rental laws that limit the power of local government units.
The only exception to this regulation occurs when the preceding owner of a property maintains possession of a residential structure after closing its sale and leases the property back from the successor owner for a period of time set up in a written agreement.
Violations to the Naperville Airbnb laws are subject to a $1,000 fine for a first offense and a $2,500 fine for each subsequent offense within 12 months. Each day of renting out on a short term basis is considered a separate offense.
In sum, Naperville vacation rental regulations prohibit this business in the city.
5. Ottawa, Illinois Short Term Rental Laws
The City of Ottawa has more elaborate short term rental regulations than other cities and villages in the state. Ottawa defines a short term rental as a dwelling or a dwelling unit that is offered, advertised, or operated for the public to use for transient occupancy by guests for a period shorter than 30 consecutive days.
This excludes hotels, motels, inns, bed and breakfast establishments, and dwelling units owned by the federal government, the state, or other political divisions.
Vacation rentals are only allowed in zoning districts where residential dwelling units are a permitted use or conditional use. Short term rental owners and operators need to obtain a license for each property.
The application has to include the following information:
- Property address
- Owner’s name, address, email address, and phone number
- Manager’s name, address, email address, and phone number if applicable
- Maximum number of occupants
- Hosting platforms if applicable
- A statement that certifies that the owner consents to inspections by the city
- Other appropriate information
The Ottawa short term rental license application requires the payment of a fee of $100. Each license is valid from January 1st to December 31st. Licenses cannot be assigned, sold, or transferred to other people.
Ottawa imposes some restrictions that hosts need to keep in mind. Recreational vehicles cannot be used as short term rentals. Such properties cannot host events like weddings, graduations, family reunions, and other mass gatherings. The noise level should comply with relevant regulations.
The minimum combined sales tax rate for Ottawa vacation rental operators is 7%.
Failure to comply with any of these regulations can result in a fine between $500 and $750. A short term rental license can also be suspended or revoked in some cases.
In brief, Ottawa, IL has some of the most conducive Airbnb laws in the State of Illinois.
Bottom Line
The short term rental laws in Illinois aim to protect public health, safety, and wellbeing while allowing investors to benefit from this lucrative opportunity. State-level regulations are few, whereas each city has its own rules that range from barely regulating vacation rentals, like Aurora, to prohibiting them altogether, like Naperville. It is the responsibility of each host to check out and understand applicable rules and abide by them.
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