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Every week, Mansion Global poses a tax question to real estate tax attorneys. Here is this week’s question.
Q. I’m looking to buy a winter home in Phoenix and I want to rent it out the rest of the year. What kind of taxes am I facing?
A. How much tax is paid on a rental unit in Phoenix depends on how many properties are owned by the landlord and whether the tenants are short- or long-term occupants.
Fees paid by owners of rental properties rented for 31 days or more are charged locally, according to Jordan Ayan, an Arizona-based agent at the Lifestyle Collection at Launch Real Estate.
“There is no standard state rental tax in Arizona, but most communities have a community tax that they impose, [although] currently Flagstaff and Tucson do not,” he said in an email. “It therefore gets a bit complex to figure out.”
More: How Will Proposed Tax Decreases in Dallas Affect My Property Tax Bill?
Not only do municipalities charge different rates on long-term rentals, the number of properties owned by the person renting out the unit is also an issue.
A person with one or two residential units “is not deemed to be in the rental business, and is therefore exempt from the tax,” according to Phoenix’s tax code.
But if an owner has three residential properties throughout the state—or one residential and one commercial property—they are on the hook for the tax. In addition, a property manager or broker who manages residential rental units must pay the tax on any homes within Phoenix.
Landlords are “required to obtain an Arizona transaction privilege tax license from the Arizona Department of Revenue for each location where residential rental income is taxable,” according to the state Department of Revenue.
Phoenix charges landlords a rate of 2.3% on the gross income on properties they rented out for 31 days or more, according to the city’s finance department. The rate varies throughout the state (for example, in Scottsdale, the rate is 1.75%).
However, “if the rental term is less than 29 days, they are taxed as they are considered transient lodging,” Mr. Ayan added. In addition, the state also charges a fee for this type of rental.
The Phoenix tax rate for these properties is 5.3% and the combined rate, including state and county taxes is 12.57%, according to the city’s Finance Department. These taxes are due monthly, unlike annual property taxes.
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