In 2023, Arizona passed a law that abolished rental tax. The law is not set to take place until January 1, 2025, to allow cities and towns to adjust to the loss of income. Because this is such a hotly contested issue and because it relies on landlord passing this savings on to residents, both tenant advocates and news media will be watching landlords closely to ensure compliance with the law and that residents actually receive the reduction in their rent.

Here are the things you need to know:

1. This doesn’t take effect until January 1, 2025. However, you must plan now and stop all rental tax on that date.
2. On January 1, 2025, landlords are prohibited from charging the rental tax. In other words, landlords should actually decrease the amount they are charging residents at that time.
3. The law creates a basis for a tenant to sue over the tax amount if it’s still being collected by the landlord. This was a contested issue and there will be people searching for landlords that do not pass along these savings. Not only will you get sued (potentially in a class action), you will end up in the news. Further, as you can see from the story below, you may get sued by the attorney general as well.
4. It’s not just the tax on rent that is decreased. All previous charges that had taxes on them, should also be decreased. For example, if late fees were $5.00 plus $.09 in tax, that part that is tax, should be removed in 2025. Late fees would only be $5.00.
5. For all new residential leases starting on January 1, 2025 or later, the lease should not include rental taxes.
6. Landlords should start to notify tenants of the reduction in the amount owed, and advertise it publicly. This should be promoted as a good thing for residents. Under ARS 33-1314 a landlord is required to serve a formal, legal 30 day notice to change the tax rate. When you are increasing the tax, you absolutely have to do so. However, since you are abolishing the tax pursuant to state law, and because the tenant is saving money, it’s not clear whether a formal 30 day notice is required, or you can simply send notices via community communications and via email. It’s unclear what damage a tenant would have, if no formal notice is sent.
7. This ban does not apply to commercial rentals (meaning cities can charge a rental tax).
8. This ban does not apply to “health care facilities, long-term care facilities or hotel, motel or other transient lodging business.” ADOH has already come out and said this only applies to long term residential dwellings. Therefore, short term rentals will still have to pay the applicable tax. You must know this if you operate a hybrid model, and must tax accordingly.

This elimination of rental tax will cost the cities a lot of money and there was a lot of press about how landlords are not going to change and were just going to keep the extra funds. It is critically important that this not happen. Landlords must be compliant starting on January 1, 2025. All residents should see a decrease in their rent and related charges, when the tax is stopped. If you do not separately line item this tax on monthly rental statements, you may need to consult your tax accountant to determine what impact, if any, this may have on the billings to the tenants.

1. When does the rental tax end?

The rental tax will officially be abolished on January 1, 2025. From this date forward, owner-operators are no longer permitted to charge the rental tax on long-term residential leases. It’s essential to start preparing now so you can smoothly adjust your billing and leasing processes.

2. Do I need to notify my tenants?

Yes, communication is key. Although a formal 30-day notice is typically required for changes in tax rates, it’s unclear whether this applies when eliminating the tax. Since this change benefits tenants, you can notify them via community communication channels and email. Proactively sharing this good news will also help build trust and transparency with your residents.

3. What happens if I forget to remove the tax?

Non-compliance can have serious consequences. If you fail to remove the rental tax by January 1, 2025, tenants could take legal action against you, which may result in class-action lawsuits. In addition, the Attorney General may become involved, and there’s a risk of negative media attention. Staying compliant is essential to avoid these issues.

4. Does this apply to late fees and other charges?

Yes. The rental tax elimination doesn’t just apply to rent; it also impacts any other fees or charges previously subject to tax. For example, if you currently charge $5.00 for a late fee plus tax, the tax portion must be removed. Starting in 2025, that fee would just be $5.00.

5. Does this apply to commercial properties?

No. The rental tax ban applies exclusively to long-term residential leases. Commercial properties, short-term rentals, health care facilities, and transient lodgings such as hotels and motels are excluded from this change. Be sure to check your property portfolio and ensure you’re applying the rental tax elimination only where it’s required.

6. Do I need to change my leases?

Yes. For all new leases starting on or after January 1, 2025, ensure that your lease agreements do not include any references to the rental tax. This includes removing language about the tax from the lease terms. It’s a good idea to review your lease templates now and make any necessary adjustments to stay compliant.

7. Will I need to change rent for existing leases?

Yes, existing leases must be adjusted to reflect the removal of the rental tax. As of January 1, 2025, you must decrease the rent by the amount previously charged as tax. Tenants should see this reduction in their rent statements, and it’s important to make sure your billing is updated accordingly.

8. What if I don’t line-item the tax on rent statements?

If you do not currently itemize the rental tax separately on your rent statements, it’s advisable to consult with your tax accountant to determine how this change will impact your billing processes. Ensuring that tenants benefit from the tax elimination is crucial for maintaining compliance and avoiding any legal complications.

9. What’s the best way to promote this change to tenants?

Presenting this change as a benefit to tenants is a great opportunity to build goodwill. Notify your residents early about the reduction in rent and other charges, and emphasize the savings they will receive. Clear communication helps demonstrate transparency and shows that you are passing the savings directly to your residents, fostering trust and a positive landlord-tenant relationship.

Republished with the permission from Arizona Multihousing Association.  

REMEMBER: Landlords and property managers must stop collecting all taxes on existing residential leases beginning January 1, 2025 (except for short term rentals).  Please remind your investor clients that they must comply.