AZ Gets Rid of Rental Tax in 2025

Governor Katie Hobbs just signed a bill getting rid of the Residential Rental tax in Arizona. But don’t change your policies and procedures just yet! The change doesn’t go into effect until January 1, 2025. If you are in a city, such as Tucson, or a county island that doesn’t charge a rental tax, this will not impact you.

Here is what you need to know and what you need to do:

• The law does not go into effect until January 1, 2025. Therefore, you have at least one year before you do anything.
• On and after January 1, 2025, landlords are prohibited from charging the rental tax. In other words, landlords should decrease the amount they are charging residents at that time. The law creates a basis for a tenant to sue over the tax amount if it’s still being collected by the landlord. It says if there’s a civil suit—presumably filed by an unhappy tenant—the burden is on the landlord to show that none of the rent being charged is attributable to the Residential Rental tax once it disappears.
• Remember, it’s not just the tax on rent that is decreased. The taxes applied to all previous charges should be reduced as well. For example, if late fees were $5.00 plus $.09 in tax, that part that is tax should be removed in 2025.
• For all new residential leases starting on January 1, 2025, or later, the lease should not include rental taxes. This includes month-to-month and renewals or extensions of older leases.
• Starting in late 2024, landlords should plan for the change in not charging rental tax and begin to notify tenants of the reduction in the amount owed.
• This ban does not apply to commercial rentals (meaning cities can charge a rental tax).
• This ban does not apply to “health care facilities, long-term care facilities or hotel, motel or other transient lodging business.” It appears that cities can tax short-term rentals.
• Remember, this just came out and it won’t go into effect for a while. In the meantime, we will learn additional information and communicate it to our clients.

Rental Market Statistics

The number of active rental listings has been climbing since June of this year. There are multiple reasons for this.

1. Seasonality – The 4th quarter of the year is a slower time for activity on rentals.
2. Super Bowl season “Airbnb” (Vacation Rental) purchases. Many homes were purchased by inexperienced “investors” who wanted to cash in on the high rental prices during the Super Bowl. Now those homes are sitting empty from the drop in vacation rentals and some/many are being converted into long-term rentals and increasing inventory numbers.
3. Vacation Rentals may become more difficult and expensive to carry as an investment. Several cities in the Valley have started enacting much stricter rules on Short-term vacation owners. They must be registered with the city and a local person listed who can be contacted regarding complaints. So the owners have to accept liability for the nuisances of their vacationers. They must also consider the cost of registering and the possibility of being taxed at a much higher rate than they are now. Municipalities are considering taxing these owners similarly to a hotel/resort. This is pushing more Vacation Rentals into Long-term rental inventory.

I am seeing the rental prices starting to drop which is common as the inventory rises. It is the principle of Supply and Demand. I think once we get through the 4th quarter, we will see rental prices stabilize and possibly increase slightly through the Spring.

If you have questions, I can help. Whether you’re contemplating the purchase of another investment property or considering the liquidation of a current one, both situations fall within my area of expertise. Feel free to give me a call, and we can discuss the opportunities available to you.

Louisa Ward
Associate Broker