If you rent out residential or commercial real estate in Washington on a long-term basis, that rental income is not subject to the state’s business and occupation (B&O) tax—or to retail sales tax. The exemption is well established, but it is narrower than many owners assume: it turns on how long the tenant stays and how much control they have over the space.
The General Rule
The Washington Department of Revenue puts it plainly: renting or leasing real estate is not subject to B&O tax or retail sales tax. The exemption traces to RCW 82.04.390, which removes amounts derived from the sale or rental of real estate from the B&O tax base, and it is detailed in WAC 458-20-118. For a typical landlord signing a one-year residential lease, the rent simply is not part of gross income for B&O purposes.
What Actually Qualifies as a “Rental”
Not every arrangement that looks like a rental gets the exemption. To qualify as an exempt rental of real estate—rather than a taxable “license to use” real estate—the Department requires that all of the following be true:
- There is a landlord/tenant relationship.
- The tenant has exclusive use of the rented space.
- The rental period is one full month or 30 days, or longer.
- The tenant has the exclusive right of continuous possession.
- The tenant has dominion and control of the space.
If the owner keeps control of the space, the arrangement is usually a license to use real estate, which is taxable under the Service and Other Activities B&O classification. Common examples include a barber’s chair or salon booth rental, a shared desk or booth without exclusive possession, and placing a vendor’s coin-operated machine in another business.
The 30-Day Line: Long-Term vs. Short-Term Lodging
The most common trap is duration. Short-term lodging—stays of less than 30 days at hotels, motels, and short-term rentals such as Airbnb or VRBO—is not an exempt rental. It is a retail sale, subject to Retailing B&O, retail sales tax, and typically additional local lodging or transient-rental taxes.
The treatment flips at 30 days. When a guest occupies the same unit for one month or 30 continuous days or more, they become a “nontransient,” and the stay is treated as a rental of real estate that is exempt from B&O tax. If the tenant contracts in advance to stay at least 30 days, they are treated as nontransient from the first day. In other words, the same unit can generate taxable income as a nightly rental and exempt income as a long-term lease.
Important Limits and Recent Changes
- Self-storage lost the exemption. As of April 1, 2026, renting space at self-service storage facilities is no longer treated as an exempt rental of real estate; that income is now subject to Service and Other Activities B&O tax.
- Other taxes still apply. The exemption is limited to B&O and retail sales tax on the rent itself. Owners still pay property tax, short-term operators still owe sales and lodging taxes, and renting out tangible personal property—furniture, equipment—remains taxable even when the real estate is not.
- Mixed-use and shared space are risk areas. Bundling services with the space, or sharing space without giving the tenant exclusive control, can turn exempt rent into taxable license income.
What Owners Should Do
- Match the lease to the exemption: a written lease of 30 days or longer that gives the tenant exclusive possession and control is the cleanest path to exempt treatment.
- If you offer short stays, register and collect the applicable Retailing B&O, sales, and lodging taxes—do not assume “rental income” is automatically exempt.
- Keep records of stay length and lease terms; on audit, the Department looks at continuous occupancy and control, not the label you use.
- Have counsel review any arrangement that mixes space with services, storage, parking, or shared use, where the exemption most often breaks down.
This post is for general informational purposes only and is not legal advice.
If you have questions about structuring a lease or your Washington tax obligations as a landlord, you can reach us at https://martinkreshon.com or call (206) 929-0609. You can also find reviews for Martin on Google and Avvo.