With the introduction of Rhode Island’s latest tax legislation, known as the Taylor Swift tax, part-time landlords are confronting a new financial reality. This law, formally titled the Non-Owner-Occupied Property Tax Act, will take effect on July 1, 2026. It specifically targets owners of vacation rentals who do not occupy their properties for at least 183 days each year.
The tax structure imposes an annual surcharge on properties valued over $1 million. The charge is set at $2.50 for every $500 of assessed value that exceeds this threshold. For example, a property valued at $3 million could incur an additional tax of approximately $10,000 annually, further increasing the existing property tax burden.
The implications for short-term landlords
The Taylor Swift tax derives its name from the renowned pop singer, who purchased a mansion in the upscale Watch Hill area in 2013 and is regarded as a part-time resident. Estimates suggest that Swift may face an extra tax liability of about $136,000 once the law is enacted. The primary goal of this tax is to generate additional revenue for state housing initiatives and to promote the use of properties that often remain vacant.
Reactions from the real estate community
Responses to this tax have been mixed within the real estate sector. Many brokers and agents have voiced concerns that this added financial burden could deter vacation homeowners from visiting Rhode Island, negatively impacting local businesses. As Donna Krueger-Simmons, a sales agent from Mott & Chace Sotheby’s International, stated, this tax penalizes those who contribute to the local economy through their spending during visits. Similarly, Lori Joyal of Lila Delman Compass argued that this tax could drive away significant expenditure that supports small businesses in these towns.
Similar tax reforms in other states
Rhode Island is not alone in implementing measures aimed at vacation properties. In Montana, new reforms will take effect in 2026, differentiating between primary residences and secondary homes. Here, owners of non-primary residences and short-term rentals will be subject to a flat tax rate of 1.90%, regardless of property value. Homeowners who reside in their properties for more than seven months may qualify for reduced rates.
Meanwhile, Cape Cod, Massachusetts, is considering a similar approach with a proposed mansion tax that would impose a 2% transfer tax on real estate sales exceeding $2 million. Proponents argue that this could generate around $56 million annually for affordable housing initiatives. In Chatham, Cape Cod, full-time residents will benefit from a 35% property tax exemption starting July 1, 2026, reflecting a growing trend to address housing affordability amidst rising property values.
California’s mansion tax and its consequences
California has also enacted a mansion tax known as Measure ULA, which imposes a 4% transfer tax on properties sold for between $5 million and $10 million, and a 5.5% tax on sales above $10 million. However, this measure has faced criticism for potentially hindering housing construction, particularly in the multi-family sector, as noted by former Assembly Speaker Bob Hertzberg.
Concerns exist that wealthy property owners may seek alternatives in states with less stringent regulations, leading to a decline in local investments and tourism revenue. As such, the Taylor Swift tax and similar legislation across the country raise critical questions about the future of short-term rentals and their implications for local economies.
Navigating the new tax landscape
For short-term rental owners in states like Rhode Island or Montana, understanding the intricacies of these new tax regulations is crucial. While circumventing tax laws is inadvisable, informed investors might explore gray areas in tax compliance. For instance, if you occupy a portion of your rental property, your tax obligations could be influenced by the percentage of the home you personally utilize.
Additionally, maximizing rental income through strategic renovations and utilizing depreciation deductions could help mitigate the financial impact of these new taxes. Although these changes may present challenges, they also represent an opportunity to adapt and optimize investment strategies in a shifting regulatory landscape.