The Phoenix rental tax picture changed on January 1, 2025. Arizona now bars every city in the state, Phoenix included, from taxing residential rentals of 30 days or more.1Arizona Department of Revenue. Residential Rental Tax Changes Coming in the New Year Commercial leases are still taxed at a combined city rate of 2.90 percent,2Arizona Department of Revenue. Phoenix Transaction Privilege Tax and Use Tax Rates and short-term vacation rentals booked for fewer than 30 days remain fully taxable under a separate lodging classification. What you owe depends entirely on the type of property and the length of the stay.
Long-Term Residential Rentals Are No Longer Taxed
Arizona Senate Bill 1131, enacted as Laws 2023, Chapter 204, amended A.R.S. § 42-6004(H) to prohibit cities, towns, and other taxing jurisdictions from imposing any transaction privilege tax, sales tax, gross receipts tax, or similar fee on the business of renting real property for residential purposes.3Arizona Department of Revenue. Residential Rental Guidelines The prohibition took effect January 1, 2025. Before that date, Phoenix charged a city TPT on residential rental income. After it, that rate is zero.
If you rent only residential property, you don’t need to do anything to shut down the tax account. The Arizona Department of Revenue automatically canceled TPT licenses tied exclusively to business code 045 (residential rental) effective December 31, 2024.3Arizona Department of Revenue. Residential Rental Guidelines Landlords who also run other taxable activities, such as commercial leasing or retail, still need an active license for those activities; only the residential portion drops off the return.
Short-Term Rentals Under 30 Days Are Still Taxed
The elimination applies only to stays of 30 consecutive days or more. Income from a short-term vacation rental listed on Airbnb, VRBO, or a similar platform is classified as transient lodging and remains subject to Arizona transaction privilege tax under A.R.S. § 42-5070.4Arizona Department of Revenue. Short-Term Lodging The 30-day line is what matters. A month-to-month tenant generates no city tax liability; a two-week vacation guest does.
Short-term rental income is taxed at the state transient lodging rate plus the applicable city hotel tax rate. Cleaning fees, cancellation charges, and non-refundable security deposits all count as taxable gross income once they are no longer refundable to the guest.4Arizona Department of Revenue. Short-Term Lodging Hosts need a TPT license and must file returns like any other taxable business in the city.
Commercial Rental Rate and Tax Base
Leasing commercial real property in Phoenix remains fully taxable. The city imposes a transaction privilege tax of 2.80 percent on gross income from commercial rental activity, plus an additional 0.10 percent surcharge on nonresidential property under Section 14-446 of the Phoenix City Code. The combined city rate is 2.90 percent.2Arizona Department of Revenue. Phoenix Transaction Privilege Tax and Use Tax Rates
The tax base is broader than many landlords expect. Everything the tenant pays under the lease counts as gross income to the landlord: base rent, common area maintenance charges, property tax pass-throughs paid to the landlord or directly to the county, mortgage contributions, insurance reimbursements, repair costs, forfeited deposits, and court-ordered recoveries.5City of Phoenix. Commercial Real Property Rental Transaction Privilege (Sales) and Use Tax A common mistake is assuming only base rent is taxable, which can leave years of underpayment for an auditor to find.
This is a tax on the privilege of doing business in Phoenix, not a sales tax on the tenant. Most landlords pass the cost through in the lease, but the legal obligation to report and remit sits with the property owner.5City of Phoenix. Commercial Real Property Rental Transaction Privilege (Sales) and Use Tax
Getting a TPT License
Anyone still engaged in taxable rental activity in Phoenix, whether commercial leasing or short-term lodging, must hold a valid TPT license before collecting any rent. Arizona law prohibits starting or continuing a taxable business without one.6Arizona Legislature. Arizona Code 42-5005 – Transaction Privilege Tax and Municipal Privilege Tax Licenses Fees Renewal Revocation Violation Classification You apply through the Joint Tax Application (Form JT-1) on the Arizona Department of Revenue website.7Arizona Department of Revenue. Joint Tax Application for a TPT License The form asks for an EIN or Social Security Number, the physical address of each rental property, and ownership details.8Arizona Department of Revenue. Arizona Joint Tax Application
Phoenix charges nothing for a commercial-rental-only license. For other business activity, including short-term rentals, the fee is a non-refundable $50 due within 30 days of your start date, with a $50 annual renewal due each January 1. Missing the 30-day window triggers a 50 percent late fee.9City of Phoenix. Transaction Privilege (Sales) and Use Tax License Fees The state charges a separate $12 annual fee for the state-level TPT license.6Arizona Legislature. Arizona Code 42-5005 – Transaction Privilege Tax and Municipal Privilege Tax Licenses Fees Renewal Revocation Violation Classification
How Often You File
Returns go through the AZTaxes.gov portal. Filing frequency depends on your estimated total annual tax liability across all Arizona, county, and city taxes combined:10Arizona Department of Revenue. TPT Filing Frequency
- Annual, if you owe less than $2,000 a year.
- Quarterly, if you owe between $2,000 and $8,000.
- Monthly, if you owe more than $8,000.
Whatever your frequency, the return and payment are due by the 20th of the month following the period.11Arizona Legislature. Arizona Code 42-5014 – Return and Payment of Tax Estimated Tax Extensions Electronic filing through AZTaxes.gov is free.12Arizona Department of Revenue. E-File Services
Penalties and Interest
Late-filing and late-payment penalties follow the Model City Tax Code and stack quickly. A late return costs 5 percent of the tax due for each month or partial month it is overdue, capped at 25 percent. Failure to pay on time adds a separate 10 percent penalty on the unpaid amount. When both apply to the same period, the combined total is still capped at 25 percent of the tax due.13Arizona Department of Revenue. Interest and Civil Penalties
Interest runs on top. The rate is the federal short-term rate plus three percentage points, compounded annually, and it accrues from the original due date until the tax is paid. Both penalties can be waived for reasonable cause, but forgetfulness and unfamiliarity with the rules generally do not qualify.
Records to Keep
Arizona requires you to keep TPT records for four years from the due date of the return or the date you actually filed, whichever is later.14Arizona Department of Revenue. Business Record Keeping That is the state audit window. Federal rules can reach further: the IRS generally requires three years of income tax records but extends that to six years if more than 25 percent of gross income goes unreported, and indefinitely if no return was filed at all.15Internal Revenue Service. How Long Should I Keep Records Keeping rental records for at least six years covers both.
For the property itself, the IRS says to keep purchase price, improvement costs, and depreciation schedules until the limitations period expires for the year you dispose of the property.15Internal Revenue Service. How Long Should I Keep Records In practice, that means holding cost basis documents for as long as you own the property and several years after you sell it.
Federal Deduction for Phoenix TPT Paid
TPT you pay to Phoenix on commercial rental income is generally deductible as a business expense on your federal return. The IRS allows deductions for state and local taxes paid in connection with a trade or business, taken in the year you actually pay the tax.16Internal Revenue Service. Topic No. 503, Deductible Taxes Landlords who report rental income on Schedule E take the deduction against net rental income, which sits outside the SALT cap that applies to personal itemized deductions on Schedule A.